Labor Department: Wages Declining genre: Indie-Script & Polispeak

Downward spiral

Amid growing concern about inflation and the economy, recent Labor Department figures show wages may be in a period of increasing decline. Read the full Bloomberg article here. See prior Thought Theater postings on the economy here, here, and here.

June 20 (Bloomberg) -- Americans' wage gains are evaporating as inflation accelerates, helping explain why confidence in the economy isn't soaring along with job growth.

Weekly wages adjusted for inflation fell 0.7 percent last month and are down 0.2 percent over the past year, according to a report last week by the Labor Department. Pay has been flat or declined in more than half of the 65 months since January 2001, when President George W. Bush took office.

Consumer prices rose 4.2 percent in the last 12 months, more than offsetting a 4 percent increase in weekly wages, according to the Labor Department's inflation report.

Adjusted for inflation, the median income for the top 10 percent of U.S. households rose 2.3 percent between 2001 and 2004, covering much of Bush's first term in office, according to the Federal Reserve's Survey of Consumer Finances, issued in February. For the other 90 percent of households -- which earned less than $184,800 in 2004 -- the median fell 0.5 percent over the same period.

These numbers add to the argument that the Bush administration's tax cuts have had little positive impact on the vast majority of Americans. The argument that the tax cuts were beneficial to the economy may have some merit but it has not translated into the expected positive public sentiment. These wage numbers may offer the best explanation of the lagging public perceptions about the economy. Falling wages coupled with rising inflation and high gas prices may make it difficult for the Republicans to tout the economy as part of a midterm election strategy.

Sixty percent of 1,003 adults surveyed in a June 5-7 Associated Press-Ipsos poll said they disapproved of Bush's handling of the economy, while 38 percent approved. Seventy percent said the country was on the wrong track.

The University of Michigan's consumer sentiment index registered a preliminary reading of 82.4 in June, according to a report last week. While up from May, the figure is below the index's average of 88.1 since monthly reports began in 1978. It reached a record of 112 in January 2000.

Few Americans hold out the hope that incomes will improve in coming months. The share of consumers expecting their incomes to rise in the next six months dropped to 16.6 percent in May from 18 percent a month earlier, according to a survey by the Conference Board, a New York research group. The reading is approaching the 15.3 percent who looked forward to income gains in March 1993, the lowest since records began in 1967.

"The most important economic indicator is what is going into our pocket and how much and how fast it's going right back out,'' said Ken Goldstein, an economist at the Conference Board in New York. "In terms of incomes, consumers feel like they've been in a slump and haven't come out.''

If the Federal Reserve continues to increase interest rates in order to keep inflation in check, it may put added downward pressure on consumer confidence as many homeowners are faced with increasing interest rates on adjustable rate mortgages. These types of mortgages have provided consumers with additional spending power but as interest rates rise, they may ultimately hasten economic decline as consumer spending may decline faster than anticipated. In my opinion, many of the fundamental elements of a recession are beginning to materialize.

Daniel DiRito | June 20, 2006 | 7:30 AM
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