May 10, 2023
Consumer spending is the largest component of the US economy, accounting for roughly 70% of gross domestic product (GDP). This makes the outlook for consumer spending extremely important for any economic forecast. Over time, spending is driven primarily by income growth, which in its simplest form is made up of three factors: employment, hours worked, and hourly wages. In other words, when we try to forecast income growth and consumption, what we're really trying to do is determine how many people are working, how many hours they're working, and what they're being paid per hour. What our most recent data tell us is that job growth has been slowing, as have the average hours each person works. We expect these trends to continue given the uncertain outlook.
As we discussed recently, small businesses are especially important to the US economy. The National Federation of Independent Businesses (NFIB) is a leading small business association that polls its members monthly. Each month an average of more than 800 small businesses provide feedback on several areas of the economy, including sales trends, employment, and inflation. Within the employment section of the survey is a question that deals with compensation plans over the next three months. As you can see from the chart below, small business compensation plans tend to lead wage growth. In this chart we use the wages and salaries component of the Employment Cost Index as it adjusts for mix shifts in the labor market, which we believe gives a cleaner view of wage growth.
Over the past few months, small businesses have increasingly reduced their expectations around future wages, which suggests slower wage growth over the next year. What does this mean? In an environment where employment, hours worked, and wage growth are all slowing, we could see a significant slowdown in consumer spending over the next year.
Wage expectations and growth
Note : Shaded area on chart indicates a period of recession
Sources: Macquarie, Macrobond, and NFIB.
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