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Private and government employers boosted workers’ compensation by 4.5 percent in this year’s first quarter, compared to a year earlier, the U.S. labor department reported, exceeding the 4-percent bump in 2021’s final quarter and outpacing any quarterly gain since at least 2001.
Benefits were worth 1.8 percent more at the end of the quarter, notching gains for workers in management, manufacturing, and sales jobs.
However, when inflation is factored in, wages and salaries actually decreased 3.3 percent during the quarter, year over year. Inflation reached a 6.6-percent annual rate in March.
In March, consumer spending grew 0.2 percent after inflation was accounted for.
More spending on services, such as dining out and travel, drove the increase, the U.S. commerce department reported.
However, consumers’ exuberance may be waning.
Companies such as Amazon and appliance maker Whirlpool are seeing consumer demand flagging, The Wall Street Journal reported.
“Several measures show that consumer confidence is eroding quickly and economists expect demand to slow as people face high prices and rising borrowing costs at the same time,” the WSJ noted.
Consumer spending makes up about 70 percent of the U.S. economy.
Oxford Economics predicts U.S. growth will slow from 3.1 percent this year to 2 percent in 2023. Other analysts foresee a growing likelihood of a recession next year.
In some large measure, that slowdown will be due to the U.S. Federal Reserve’s moves regarding interest rates.
After hiking rates an expected quarter-point in March, markets are now pricing in the expectation that the Fed will lift rates to 2 percent by July.
“The fear is that such aggressive increases will bring an economic slump, rather than just cooling things down,” the WSJ said.
Higher Fed rates will boost mortgage interest rates, already their highest since 2009, the cost of car and other loans, and raise the cost of doing business generally.
Many companies such as Nestlé and Procter & Gamble have passed cost increases through to consumers without seeing sales volumes fall.
However, that may be changing; consumer spending grew more slowly in March than the month before, as we reported in “Consumer Spending Dipping Down” (1 Feb 2022).
“There are definitely a lot of open-ended and unquantified risks looming,” Victoria Greene, CIO at G Squared Private Wealth, told the WSJ.
“The U.S. economy lives and dies for the consumer and as soon as this consumer starts to slow down, that will hit the economy hard,” she said.
TRENDPOST: After setting a record at 33.8 percent in April 2020, the U.S. savings rate fell to a 10-year low of 6.1 percent in January and barely improved in March, edging up to 6.2 percent.
Meanwhile, as we noted in the article above, consumers are outspending inflation.
Consumers quickly unlearned a key lesson of the COVID War: the need to save more and spend less.
TREND FORECAST: For a year, workers have gotten generous pay raises, but those gains have been stolen by inflation, as we noted in “Worker Pay Grows But Inflation Beats It” (1 Feb 2022).
Inflation, continued shortages of key items, and renewed supply-chain tangles (see related story in this issue) will soon rein in consumer spending, at which point the economy will gain speed toward an inevitable recession.
TRENDPOST: Readers of the Trends Journal know that we have rejected claims that inflation was “transitory” for months. (See “INFLATION RISING. NOT ‘TEMPORARY’ OR ‘TRANSITORY.”) As long ago as 4 August 2020, we warned in our “Global Economic Trends” section that supply-chain disruptions would lead to inflation and that those disruptions would make inflation a long-term problem (“Consumer Prices Rise in July,” 18 Aug 2021).