Consumers' Income Not Growing

To get the economy growing again, economists point out the obvious – consumers need to make more money so they can spend more. In August, the government reports neither of those things happened.

Consumer income, adjusted for inflation, was flat in August. Consumption rose slightly, but adjusted for inflation, it too was flat. In other words, the consumer was pretty much dead in the water during the month.

Food and energy

“High and rising energy and food costs are really sapping this economy,” said economist Joel Naroff, of Naroff Economic Advisors, of Holland, Pa. “It is interesting to note that the price of light crude is about $4.00 a barrel lower today than it was one year ago but the price of gasoline is about $0.80 per gallon higher. Just a comment.”

Naroff says the biggest problem facing households is that wages and salaries dropped sharply during the month, meaning fewer shopping trips. There was also a cut back in government transfers, unemployment insurance in particular. Moderating unemployment claims and more people exhausting extended benefits is the likely reason.

Spending on services

Where are consumers still spending? On services, for one. The numbers show demand for services showed a solid increase. But consumers bought fewer cars and put less away in savings.

What's it going to take to get the consumer economy going again? The easy answer is jobs, but the harder question is, how to create them. Naroff says companies are following a policy that, while helpful to them in lean economic times, isn't helping the economy.

Breaking the cycle

“Just because it is good for one company to keep hiring and income down in order to improve earnings doesn't not mean it is good for the economy as a whole if every company does that,” Naroff said. “I am not saying that firms should start paying lots more to workers or hire a ton of additional people, though that would be nice. What I am pointing out is that strong growth will not return until we break the negative cycle of weak demand, which is helping create soft labor markets and limited pay increases, which is restraining spending power and ultimately consumption.”

The question for policymakers is how to break the cycle. For beleaguered consumers, the answer can't come too soon.