The fundamental component driving consumer spending income

newretailThe decline of the U.S. middle class has corporate America and Wall Street scared. And nobody is more frightened than America’s biggest retailers.   More than five years after the end of the Great Recession—August 2014—retail spending per person had finally reached its prerecession level.  The culprit is low wages and income growth for the middle class. Median household income in 2013 stood 8 percentage points below its 2007 prerecession level. The simple fact of the matter is that when households do not have money, retailers do not have customers.

As officials of J.C. Penney—whose sales fell 9 percent in 20136—put it when listing the risks to its stock value: “the moderate income consumer, which is our core customer, has been under economic pressure for the past several years.”7 Moreover, retail spending—which includes spending on everything from clothing to groceries to dining out—has broad implications for the entire economy since it accounts for a large fraction of consumer spending, which itself makes up 70 percent of U.S. gross domestic product, or GDP.

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Time and again, America’s leading corporations warn investors that “decreased levels of consumer spending” (Kohl’s), “a renewed decline in consumer-spending levels” (Sears), and “decreased salaries and wages” (Burger King)10 could have a huge negative impact on their financial performance.

  • Eighty-eight percent of the top 100 U.S. retailers cite weak consumer spending as a risk factor to their stock price.
  • Sixty-eight percent of the top 100 U.S. retailers cite falling or flat incomes as risks. Looking just at companies that were publicly held in 2006, the percent listing consumers’ incomes as a risk factor has doubled since that year. A major- ity of retailers—57 percent—cite rising energy, health care, housing, and other essential costs as risks, showing the middle-class squeeze of rising costs and stagnant incomes.
  • Wall Street economists are even more explicit about the risk that low wages pose to the economy, arguing that they drive low demand and high unemployment.
  • Retailers could improve their profits by embracing a middle-class-growth- oriented agenda instead of spending their political energy on preventing policies that increase wages. Policies such as a minimum-wage increase could provide the perfect mechanism for coordinating wage growth that could benefit the entire retail sector by fueling more consumer spending.

All economic problems are about removing impediments to supply, not demand.

The fundamental component driving consumer spending and confidence is consumers’ incomes. Consumers can use credit to increase consumption temporarily—as the lead up to the financial crisis showed—but in the long run consumption levels cannot be higher than incomes.

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Weak demand, slow consumer spending growth, and low wages are holding the economy back

Economists for major financial institutions point to weak demand, specifically the lack of consumer spending growth, as the major reason why companies are hiring so slowly. And the culprit for the lack of consumer spending is stagnant wage growth in the recovery.

American retailers will only grow if American consumers buy more. Absent another credit-fueled consumption boom, American retail spending will grow only if incomes do. Unfortunately, too many in Washington, D.C.—including retailers’ own representatives—are focused on keeping wages as low as possible by opposing sensible minimum-wage, overtime, and leave policies that would fix the coordination failure that is hurting retailers.For retailers, the worry is all about a so-called “new normal” where consumers look for bargain prices and steep discounts.92 But instead of fretting, it is time that retailers and the rest of corporate America work to create an economic environ– ment where the middle class sees its incomes grow, fueling more consumer spend- ing, growing sales, and dramatically improving corporate bottom lines.