A few days ago I urged everyone to pay less attention to consumer spending (which was up in March) and more attention to personal income (which wasn't). After all, income is the key to everything else. Spending may go up for a single month or two even if incomes are flat, but it won't rise steadily unless incomes are rising too.
Over at The Upshot, Binyamin Appelbaum passes along a new research study that comes to the same conclusion:
Ignore April’s sharp drop in unemployment. Pay no attention to the creation of 288,000 jobs announced on Friday. The most important number in the latest jobs report did not change at all.
Average hourly wages for American workers held steady at $24.31 last month. They have increased just 1.9 percent over the previous 12 months. But after adjusting for inflation, real wages have increased by something like 0.5 percent.
David G. Blanchflower, an economics professor at Dartmouth College, and Adam S. Posen, president of the Peterson Institute for International Economics, argue in a new paper that the slow pace of wage growth is the best indicator of an incomplete economic recovery. Until wages start rising more quickly, the economy remains far from healthy.
Measures of unemployment are inherently tricky. But the authors of the paper point out that you can cut through a lot of the uncertainty by simply looking at wages. "Wage inflation, after all, is basically a summary of the balance between supply and demand. Employers raise wages as they find it harder to hire and retain qualified workers, so the market, in effect, is constantly judging the extent of labor market slack." Translation: Unless people have more money to spend, the economy just isn't going to grow.
If wages aren't rising, then there's still a lot of labor market slack no matter what the headline unemployment numbers say. And right now, wages aren't rising. It's no time for the Fed to be thinking about putting its foot on the brake.