Americans are earning more money amid the strengthening job market, but economists say the arc of the recovery largely hinges on what consumers do with the extra cash.
Government data released Thursday showed wages and salaries rose 0.4 percent in January from the previous month, following a similarly strong increase in December. Total personal income increased 0.3 percent in January, and government economists recently revised their calculations upward for income growth during the second half of last year.
“There were some bright spots,” Wells Fargo senior economist Mark Vitner said. “Wage and salary growth has clearly improved in recent months, confirming the pickup in employment.”
The rise in income tracks the steady decline in the nation’s unemployment rate from 9 percent over the summer to 8.3 percent last month. The good news continued this week as new jobless claims hit their lowest level in four years. The number of people filing for unemployment benefits was 351,000, down from last week and fewer than analysts had expected.
Improvements in income and employment are crucial drivers of consumer spending and therefore key components of the country’s economic recovery. The pickup in the labor market gives consumers more confidence to spend, and more money in their wallets gives them the means to do so.
The problem is that so far it is unclear whether Americans will buy into that scenario.
Consumers have used part of the extra income to pad their savings. According to the government data released Thursday, the personal savings rate was 4.6 percent in January, down slightly from the previous month but up from the fall. Although economists, and many families, recognize that consumers need to shore up their finances after taking on excessive debt during last decade’s boom, a high savings rate can also slow the pace of recovery.
“They’re just sort of sitting back a little bit, saying, ‘I need to be a bit more cautious,’ ” said Paul Dales, senior U.S. economist for Capital Economics.
Meanwhile, higher gasoline prices are eating away at Americans’ bottom line. Consumer spending remained flat from November to January when adjusted for inflation, according to the government’s data. Disposable income, the money households have left over after taxes, actually declined 0.1 percent in January when inflation is factored in.
Gas prices are one of the main culprits. Vitner said energy costs have risen at a 4.8 percent annual rate in the past seven months. Government forecasts put the average price of a gallon of regular gasoline at $3.62 during the peak travel season from April to September, 7 cents higher than the projected annual average. And the government says there is a one-in-four chance that the average price at the pump could exceed $4 this summer.
“In order to make this a really sustainable, strong recovery, we need to have both declines in unemployment and strong growth in demand and production,” Federal Reserve Chairman Ben Bernanke told lawmakers Thursday at a hearing on Capitol Hill.
There are some signs, however, that consumers may come out of hiding. On Thursday, automakers and retailers reported surprisingly strong February sales, although the government’s official tally won’t be out for another week and a half.
According to the International Council of Shopping Centers, a trade group, February sales at about two dozen of the nation’s largest retailers jumped 6.7 percent, compared with last year. Chic discounter Target exceeded its performance expectations, both in the amount of traffic at its stores and the amount shoppers spent.
“We’re very pleased with the pace of our sales since the holiday season,” Target chief executive Gregg Steinhafel said in a statement.
Even the beleaguered Gap chain reported positive monthly sales for each of its three U.S. divisions: Gap, Old Navy and Banana Republic. Company officials said results were buoyed by the relatively warm weather and the customer response to its spring merchandise.
“Consumers are still very much in the game,” said Stuart Hoffman, chief economist at PNC Financial Services Group.
Meanwhile, automakers also posted impressive gains in February. General Motors, defying analysts’ expectations of a sales decline, reported a 1.1 percent increase last month, compared with a year ago. At Ford, sales jumped 14 percent, and at Chrysler, they shot up 40 percent.
GM’s U.S. sales chief Don Johnson predicted that automakers would enjoy their best month since the financial crisis hit in 2008. The strong performance comes despite higher gas prices and reduced promotional incentives from many manufacturers, according to car-buying website Edmunds.com.
Still, many economists caution that although the recent economic data and reports from businesses are encouraging, they have not become self-sustaining. In his testimony before Congress on Thursday, Bernanke described the virtuous cycle that could propel the nation’s recovery.
“If people are confident about their job prospects and about their income prospects, it can be a self-fulfilling prophecy as they go out and they become more confident in their purchasing habits.”