An interesting article from Bloomberg News highlights the correlation between wages and U.S. economic growth. The article points out that the interaction between the two has never been as closely linked in the last 50 years as they are now (the correlation stands at 0.93 at the moment). The idea behind this is that the majority of household consumption is reliant on wages – purchasing goods on credit is no longer a viable option. This may be a large reason why the Fed is examining incomes when deciding that the interest rate will increase at a slower pace than previously projected. Another aspect of this is recession’s after-effects: households may have already relied too much on credit cards to survive the recession and not willing to incur further debt.
The high correlation between wages and economic production may also be driven by households’ hesitance to refinance home equity to supplement incomes. In the second quarter of 2006, cash-out home refinancing was $99 billion – comparatively, it was $6.7 billion last quarter. The tight relationship between wages and economic production may hold at such high levels, thanks to government oversight. The Consumer Financial Protection Bureau, implemented in 2009, helped consumers understand exactly how much they pay in fees when using credit cards. What do you think? Is there more to this story? Should we think that this correlation is very informative or well-founded?
6 Comments
Intuitively, I think the correlation makes sense. Those who have found it suddenly impossible to pay off their mortgages in 2008 may have become more cautious in joining the housing market again. Not sure about the behavioral change regarding credit cards, I would be interested if anyone can give me potential explanations for this.
I agree with HeeJu, that the correlation makes sense. I assume that the behavioral change with credit cards is partially a psychological sentiment, but also the result of credit card companies wanting to protect themselves against risk, by slashing credit limits.
People probably have been taught a bit of a lesson by the recession not to spend beyond their means, a bit in the way my grandfather after having lived through the great depression shunned buying anything on credit his entire life; people are likely not trying to take on more debt than they know is good for them. The article does say that consumers are shunning credit and paying for what they can afford.
In a macroeconomic context, this suggests we divide the population into two groups: those who are cash-flow constrained (one metric: no significant savings) from the rest. My understanding is that the ratio of the former has risen, in part because wages for the lower half of the income distribution have fallen, and not merely due to the drop in housing prices that left many households in a negative net equity position (“merely” is malapropos in that it is not a trivial issue for those hit by the combination of the housing price drop and a loss of employment).
It was interesting to see that this phenomenon is typically ignored in most macroeconomic models, or rather it is assumed that consumption is ‘smoothed’ over time. I wonder if this consumption trend is typical in other economies as well.
One other point: such correlations are typically quite sensitive to the choice of periods. You can check the data against the recession turning points suggested by the NBER (National Bureau of Economic Research), a research organization that is the “official” source of starting and stopping points for recessions.
Comments are closed.