U.S. job gains hint at more spending and hiring
Monday, 26 March 2012 | 11:00
It's not quite Easy Street, but more money is starting to flow along Main Street. A recent acceleration in U.S. job growth could create a virtuous cycle, lining the pockets of more Americans, leading to more spending, faster growth and further hiring.
The pickup isn't enough on its own to guarantee a robust recovery, but it offers hope that the brighter economic signs in recent weeks will prove lasting.
On an annualized basis, the 734,000 jobs created over the past three months probably generated about $360 billion in additional income, when taking into account the modest rise in hourly earnings and longer working hours, economists say.
It's this expected lift from income that could spur a self-feeding cycle of spending and hiring, and help bolster the tepid U.S. economic recovery.
"There is some probability that it will feed on itself and that this acceleration we have seen in employment will translate into stronger GDP growth, stronger income growth and a stronger economy over the quarters ahead," said Ray Stone, an economist and a co-founder of Stone & McCarthy Research Associates in Princeton, New Jersey.
"I would like to wait for a few months before concluding we are on Easy Street here, but I am encouraged."
THE RECOVERY'S MISSING INGREDIENTS
Strong job growth and healthy income gains have been the missing ingredients in the recovery from the 2007-09 recession. While growth in per capita wages is still restrained by the huge number of Americans hunting for work, the situation should improve as the labor market strengthens.
"With employment gains starting to accelerate, it's certainly something that will push income growth to be more consistent with employment growth, and therefore it creates a virtuous cycle that we are all waiting for," said Torsten Slok, a senior economist at Deutsche Bank in New York.
Every gain of 100,000 in payrolls should lead to monthly income growth of 0.2 percent to 0.3 percent, according to Millan Mulraine, senior macro strategist at TD Securities in New York.
"If the economy generates 225,000 to 250,000 jobs per month for the rest of the year, nominal income growth could accelerate and be sustained at a more respectable 0.4 percent monthly average," Mulraine said.
Over the six months through January, income rose an average of 0.3 percent per month.
A quicker pace of income growth could boost consumer spending - the economy's main engine - by about 0.2 percent on an inflation-adjusted basis when taking into account a relatively comfortable pad of savings that households could tap, according to Mulraine.
With inflation tame, the quicker spending could help push GDP up by about 2.5 percent to 3 percent this year - not gangbusters but hopefully enough to keep whittling away at a jobless rate that's still running high at above 8 percent.
"While this is not an especially strong pace of growth, it will mark a material acceleration in the pace of the recovery, and will place the recovery on much firmer footing going into 2013," Mulraine said.
Last year, the economy grew only 1.7 percent.