US revives economy after pandemic: High wages, low inflation
According to the website U.S. wage growth, once an inflationary risk, may be the prop needed for a soft landing.
Last year's economic report helped make the point: the US economy is experiencing moderate growth thanks to higher wages for workers and an expanding labor supply, without adding to the inflationary pressures the Fed is seeking to mitigate.
In November 2023, wages rose 4% year-over-year. This tells us that the pace of wage growth is slowing, but still above the 3% level - the level policymakers want to achieve.
However, combined with recent productivity gains and a decline in average hours worked per worker, labor costs per unit of output fell in the third quarter of 2023. This has held down wage growth and incentivized companies to raise prices even as workers' incomes have increased.
Increasing the labor supply by half a million people has also been recognized by the Federal Reserve and other economists as a means to increase output without contributing to inflationary pressures. For example, by raising wage companies in a more constrained labor market.
The unemployment rate fell to 3.7 percent from 3.9 percent in October, and the 4 percent jump in average hourly earnings contrasts with the recent annualized increase in consumer prices of about 3.2 percent.
No crash
The Fed's focus has increasingly shifted to monitoring household consumption as a key factor in achieving a soft landing after the inflationary pressures from the pandemic.
During this period, wages rose sharply as workers avoided jobs they considered unsafe. Bank accounts were replenished by government aid, which was spent on goods whose demand was struggling to be met by the world's factories. Currently, the Fed is aiming to keep demand fairly moderate. This would allow inflation to continue to slow without pushing the economy into recession.
Households are currently hampered by high interest rates that have led to the recent decline in consumer borrowing, which is hurting demand. At the same time, job creation and wage increases are offsetting the impact of high wages.
Consumer spending rose just 0.2% in October, and its average growth over the past nine months has returned to its pre-pandemic trend. Consumer credit rose $5.2 billion in October, up from $12 billion a month earlier.
Pantheon Macroeconomics economists Ian Shepherdson and Kieran Clancy said the dynamics of consumer credit in the US, including the recent rise in delinquency rates, lead them to expect a "softening" in consumption alone.
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