Sluggish pay raises have been an Achilles’ heel for American workers since the Great Recession ended more than eight years ago – and a major headwind for faster economic growth. As a result, many people are spending less than they otherwise would. That trend, in turn, contributes to slower overall growth in the U.S. economy, because consumers account for roughly 70 percent of economic activity. Dan North, chief economist for Euler Hermes North America, part of the world’s oldest and largest credit insurance company, spoke recently with The Associated Press about how income after taxes – what analysts call disposable personal income – isn’t keeping pace with consumer spending growth.
Q: What are the factors driving U.S. economic growth right now?
A: We think for the entire year we’re likely to see GDP growth of around 2 percent. But consumers have a few headwinds. First of all, real disposable personal income growth is increasing at just 1.3 percent. That’s very slow. Consumer spending is increasing at a faster rate. If you look at personal consumption expenditures, that’s rising at 2.7 percent. As a result, consumers have to dip into their flow of savings to pay for items. Without income growth, it’s hard for consumption growth to continue. The big story is we don’t have enough income. Consumer confidence has soared since the election. But consumers often say one thing and do another. To spend, you need the willingness and ability. Consumers are saying they have the willingness, so it would seem. But that’s not enough. You’ve got to have the ability to spend, too.
Q: What would unlock stronger income growth?
A: The low unemployment rate doesn’t tell the whole story. Our participation rate – the share of people with jobs or looking for work – is quite low as well. We need more people at work. And we need those people to be earning higher wages. You might think that the low unemployment rate would lead to higher wage growth, but it hasn’t. One reason is that productivity has been very weak. When you have weak productivity, you have weak wage growth.
Q: What role to baby boomers and millennials play in all of this?
A: This demographics of the aging workforce is really tough. What’s happening is we have baby boomers who are leaving the workforce at a rate of 10,000 every day. They probably will keep doing that for the next 12 years or so. We can’t replace them fast enough, and employers can’t find the right people with the right skills to fill those jobs. One way to address that is to have more skilled legal immigration. President Trump took a step in the right way with a proposal to focus on bringing in more skilled immigrants. But then then he took a step backward by planning to cut down the number immigrants being admitted.
Q: Can businesses get enough access to credit?
A: Small and medium businesses have a desire to expand, but there is still caution on pulling the trigger. So there is a lack of loan demand. You see the numbers where the growth in commercial loans may not be strong, but you look at the banker survey and say, well, a lot of businesses aren’t really interested in getting credit yet. That’s kind of hampering the expansion of credit.