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?