[PEN-L:33070] US wages

["Ian Murray" <seamus2001@xxxxxxxxx>]

Rising Incomes Keep Economy Afloat
Higher Pay, Tax Savings and Home Refinancings Giving Consumers Reason to
Spend

By John M. Berry
Washington Post Staff Writer
Friday, December 13, 2002; Page E01


Yesterday's report that retail sales were stronger than expected last
month underscores a core element of strength in the current rocky state
of the economy: rising personal income.

After-tax personal income has increased a hefty 8.1 percent since March
2001, the beginning of the last recession. That is better than in all
but a couple of the boom years of the late 1990s. Even after adjusting
the gain for the effects of inflation, the increase was still a high 5.6
percent.

So, even with the threat of war looming and the unemployment rate
climbing to 6 percent, consumers have money to spend. And they are doing
so.

"The consumer has remained a key source of stability, confounding
skeptics who view consumer debt, low savings and lower equity prices as
a formula for outright retrenchment. In 2003, consumers remain unlikely
to cut spending," noted a Salomon Smith Barney analysis released this
week.

The amount of money in consumer pockets is up for two reasons:

First, personal incomes -- measured as revenue from all sources,
including include wages, rents, dividends, noncorporate profits and
government payments such as unemployment benefits -- never fell during
last year's recession, in part because workers' pay rose fast enough to
more than offset the income lost by those who became unemployed.

Second, the personal income tax cuts enacted last year have lowered
household tax liabilities by about $230 billion, according to Commerce
Department estimates.

At the same time, other developments have allowed consumers to make
their incomes go further.

For instance, interest rate cuts by the Federal Reserve have helped
lower consumers' interest payments on their debt -- even though the
amounts of debt owed on credit cards, auto and bank loans and home
mortgages have all increased -- by about $23 billion. Part of that
savings comes from the boom in mortgage refinancings, as homeowners
rushed to lock in the lowest rates in decades.

The refinancings, as well as home sales, have also allowed homeowners to
extract some of the equity in their homes to pay off more costly debt,
to spend on new purchases or to invest. Those so-called capital gains
are not counted as part of personal income.

In addition, over the past year and a half, the prices for goods, such
as automobiles and clothing, on average, have been virtually unchanged,
allowing consumers' rising after-tax incomes to go further. In contrast,
prices of services, such as health care and education, have gone up
slightly more than 4 percent over the period.

With added money to spend from all those sources, consumer purchases of
goods and services have jumped 6.8 percent over the past year and a
half. But with their after-tax incomes up more than that, personal
saving as a percentage of after-tax income also rose to 4.2 percent in
October from 2.6 percent in March 2001. In dollar terms, saving in
October was running at an annual rate of $335 billion compared to $190
billion at the beginning of the recession.

Against such a financial background, some economists say it should be no
real surprise that consumers have been willing to keep the economy
afloat, or to assume that they will continue to do so.

"Every empirical study will show that it is real disposable income and
the level of interest rates that largely determine consumer spending,"
said Mickey Levy, chief economist for Bank of America in New York. "The
sustained increase in real disposable income and the lowest interest
rates in 40 years have tended to offset the negative wealth effect from
the falling stock market."

Levy noted that the total number of hours worked in the economy is still
somewhat lower than it was when the recession began, but income from
wages and salaries nevertheless has gone up and it has gone up faster
than prices.

"It has been the sustained, large gains in labor productivity that have
supported the increase in real wages," Levy said.

In other words, the big gain in the efficient use of labor allowed
employers to boost pay faster than inflation, giving workers the
wherewithal to spend more.

As for household wealth, it soared along with the stock market bubble
and fell once the bubble burst in the spring of 2000. Households lost
about $3.6 trillion in the stock market before the recession hit in 2001
and have lost another $2.5 trillion in stock and mutual fund holds since
then, according to Federal Reserve figures. Some analysts' estimates
indicate a loss of wealth of the latter magnitude would cause a one-time
drop of about $80 billion in consumer spending in the coming year.

While the value of stock portfolios has gone down, however, the value of
residential housing has gone up. Fed estimates indicate that more than a
third of that $2.5 trillion loss has been offset by gains in home
values. That's important, Fed Chairman Alan Greenspan said last fall,
because analyses "suggest that a dollar of equity extracted from housing
has a more powerful effect on consumer spending than does a dollar
change in the value of common stocks."

Some economists have cautioned that consumers have been able to maintain
their spending only by massive borrowing that has left them with a debt
overload, but others dispute the importance of the added borrowing. For
instance, overall debt payments in the second quarter of this year took
14.04 percent of disposable income, according to Fed figures. That share
is larger than at any time during the 1990s, but it is up less than a
percentage point from the average for the second half of the decade. The
debt service burden is also no higher than it was in 1986 and 1987.

Consumer debt payments, such as those on credit card balances and auto
loans, took 7.84 percent of disposable income in the second quarter, a
figure also higher than in most of the 1990s but again no higher than in
1986 and 1987. On the other hand, mortgage debt payments required 6.20
percent, a level that has risen steadily for many years as Americans buy
larger and more costly homes.