Is The Rebound In US Private-Sector Wage Growth Sustainable?

Consumer confidence bounced to its highest level in nearly a year, according to yesterday’s update from the Conference Board. Boosted by optimism on the outlook for the labor market, the index follows news on Monday that year-over-year private-sector wage growth in July strengthened for the second month in a row, rising 4.3%–the fastest annual pace since January.

“Consumers’ assessment of both current business and labor market conditions was considerably more favorable than last month,” said Lynn Franco, the Conference Board’s director of economic indicators. “Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pick-up in growth in the coming months.”

It’s encouraging to find that the firmer mood in the consumer sector aligns with stronger year-on-year wage growth in June and July. It’s unclear if the acceleration is sustainable, but for the moment the macro trend appears headed for a boost as the engine of consumer spending enjoys additional support from fatter wallets on Main Street.


Taken together, the numbers suggest that the soft US economic trend in the first half of the year is poised to speed up in the second half. A pair of estimates of third-quarter GDP growth from two Federal Reserve banks certainly fall in line with an upbeat outlook at the moment. The New York Fed’s nowcast (as of Aug. 26) anticipates US economic output will expand by 2.8% while the Atlanta Fed’s estimate calls for a 3.5% rise in GDP (seasonally adjusted annual rate), based on the bank’s Aug. 29 update. In both cases, real growth is expected to pick up substantially vs. the weak advances in Q1 and Q2 (0.8% and 1.2%, respectively).

The outlook for moderately firmer growth has also been a staple on these pages in recent months (see the bottom chart here, here, and here, for example.)

Nonetheless, skepticism abounds. Robert Samuelson, the economics columnist for The Washington Post, this week wrote that the US is suffering from a “snooze economy.” Meanwhile, Stephanie Pomboy of MacroMavens tells The New York Times that “I don’t think there will be a second-half rebound.” She explains:

Growth will be the same as in the first half of the year, or even weaker. We have a monster overhang from inventories, and consumer spending will continue to disappoint. I’m not saying they will fall out of bed. I just see the status quo — a sideways to downward churn, with a squeeze on discretionary spending. People will cut back further in discretionary spending with the huge increase in premiums for health insurance coming later this year and next year.

No one can discount that possibility, but it’s not obvious that Pomboy’s outlook is fate either. What we do know is that the potential for modestly stronger consumer spending draws a bit more hard-data support lately via the rising trend in wage growth. If this Friday’s update on payrolls for August offers more good news for the labor market, the case for a second-half rebound will continue to resonate.