Analysis: Stagnant wages a speed-bump for economic growth

WASHINGTON Wed May 11, 2011 4:17pm EDT

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WASHINGTON (Reuters) - The failure of U.S. wages to keep pace with inflation threatens to leave economic growth sluggish and forecasts for a strong pick-up in output later this year may prove too optimistic.

Wages have barely increased since the start of the year, forcing consumers to dig deeper into their pockets to cover rising costs for food and gasoline.

Average hourly earnings rose a measly three cents, or 0.1 percent, in April from March, the government said on Friday. Over the past year, they are up a modest 1.9 percent.

For consumers the problem is that inflation has been rising much more rapidly. In March, the consumer price index increased 0.5 percent and data on Friday is expected to show a similar rise for April.

"We have a little bit of upward momentum in wages and salaries, but it's not enough to offset the rises that we are seeing in headline inflation," said Steven Ricchiuto, chief economist at Mizuho Securities in New York.

"Throw in higher energy prices and you have a concoction of slower growth. People have been over-estimating 2011 growth."

As well as higher gasoline prices, U.S. consumers are having to cope with rising prices for other everyday goods as producers and retailers seek to recoup higher costs for transportation and raw materials like cotton.

In recent weeks, U.S. companies ranging from Dean Foods to Kimberly-Clark Corp and Procter & Gamble have said they plan more price increases for everyday household products.

However, Macy's said on Wednesday that its shoppers were accepting higher prices rather than cutting back.

A Reuters survey of 78 economists in April predicted gross domestic product would average 2.9 percent this year, the same as in 2010.

Some financial institutions, including Goldman Sachs, are lowering their forecasts, citing the high energy prices and looming cuts in government spending.

Goldman Sachs on Friday trimmed its 2011 annual average growth estimate to 2.7 percent from 2.9 percent.

With the unemployment rate at 9 percent and no jobs for three out of every four unemployed workers, there is little pressure on employers to award large salary increases. There are no expectations that wage gains will pick up soon.

Average weekly earnings were negative in the past two months, after accounting for inflation. Consumer price data on Friday will likely confirm that the trend continued in April.

CONSUMERS NOT WELL POSITIONED TO LEAD RECOVERY

With wages stagnant there is little to fuel the consumer spending that accounts for 70 percent of U.S. economic activity.

"That's one of the problems that we have in this economy," said David Wyss, chief economist at Standard & Poor's in New York. "The consumer normally leads the economic expansion and he is not in a position to lead quite as much as he has in the past cycles."

In the first quarter, spending slowed to a still respectable 2.7 percent annual rate after a 4.0 percent pace in the last three months of 2010.

The slowdown acted as a weight on overall economic growth, which braked to a modest 1.8 percent rate from a much more brisk 3.1 percent pace in the fourth quarter.

Spending so far has been supported by income tax cuts and extended jobless benefits for the long-term unemployed, which were part of a $858 billion tax package Congress approved in December.

But much of that fiscal stimulus will disappear next year as the government moves to rein in spending to curb a massive budget deficit.

The tax cuts helped to cushion consumers against high gasoline prices in the first quarter, when households spent about $48 billion at an annual rate more on gasoline and fuel compared to the fourth quarter.

Economists still expect a moderate rise in spending in the second quarter, with a recent easing in energy prices lifting the strain on household budgets.

The outlook for the remainder of the year is uncertain and depends heavily on how the labor market recovery shapes up.

Although economic growth for the year is not expected to outperform that of 2010, economists remain optimistic the recovery will perk up a bit in the second quarter.

They look for a bounce back in the sectors that were hit by last winter's harsh weather and a turnaround in defense spending, which unexpectedly slumped in the first quarter.

"The main drag on first-quarter GDP was defense spending and I would expect defense spending to grow in the second quarter," said Clark Yingst, chief market analyst at Joseph Gunnar in New York.

"So you might see a rise in second-quarter GDP on that reason alone. This is not what we want to see. We want to see GDP growth driven by consumer and business spending, not by government spending."

(Reporting by Lucia Mutikani; Editing by Andrew Hay)

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