The recovery's missing link: Paychecks

Stop obsessing about the unemployment rate. For a real look at what's happening in the economy, focus on personal incomes.

By MSN Money Partner Apr 2, 2014 1:09PM
Pay check stub showing taxes withheld © Comstock, Comstock, Getty ImagesBy Tim Mullaney, MarketWatch

On Friday, all of us on and around Wall Street will go into hyperdrive to chew on the latest update to the nation's unemployment rate. But with the economy and the market entering a new stage, it's time for us to obsess about a new number -- how fast incomes are growing.

One measure of that came out last week, as the Commerce Department reported that inflation-adjusted, after-tax personal income rose 0.3 percent in February and 0.2 percent in January. And that's good news -- the same figure, which includes both wages and other income, rose just 0.7 percent in calendar 2013, but now up 2.3 percent over the last year, economist Joel Naroff points out.

"The early signs that the recovery is indeed poised to change gears will be seen in the income numbers," Naroff wrote. "People seem to be getting more money. As long as inflation remains in check -- and the price index rose only 0.1 percent both including and excluding food and energy -- it looks like household spending power just may finally be accelerating."

Why does this matter? On Main Street, it matters because income growth has been the missing link in the recovery, as new Federal Reserve Chairwoman Janet Yellen keeps saying. On Wall Street, it matters because wage growth is emerging as one of the new metrics Yellen keeps telling investors to watch for guidance into when the Fed will decide the job market is healthy enough that the Fed can ease off its years of stimulus and let interest rates rise.

You can look at the higher income growth of the last few months as good or bad news. If you think making more money is bad, you probably own bonds and are worried about interest rates rising from the virtually-zero levels we have gotten used to. If you think that recoveries are built around virtuous circles of more people being employed, making more money, and spending more, then it’s an unmixed good as long as inflation stays tame.

More of us work and spend money than own major amounts of bonds, to state the obvious.

What you can't really deny is that it's necessary. Median family income dropped about 10 percent in inflation adjusted terms between 2007 and 2011, even though the recession ended in 2009, and has made up only about a third of the lost ground, according to the U.S. Census.

That's bad for business -- weak income growth, especially among young people, is why metrics from household formation to the birth rate have all fallen sharply from pre-recession levels. It means fewer houses built, fewer clothes sold at back-to-school sales, and fewer jobs. If housing starts made up half of the margin between last year and 2007 -- just half -- it would be worth more than 1 million jobs, based on the rule of thumb that each housing start creates three jobs for a year (which I got from IHS Global Insight).

If America gets a raise, everything will work better. Including the financial markets, where anything lost on bonds should be made up in corporate profits -- and ultimately in stocks.

Even if you disagree, you now have to watch wages to know what the Federal Reserve is going to do about interest rates. In her maiden press conference as chairwoman of the Federal Reserve, Yellen made clear that wages will be a key thing she watches as she mulls when to raise rates.

She also made clear that she doesn’t think that time is at hand -- a point she came back to in Monday's speech in Chicago.

"Wage growth has really been very low," Yellen said in Washington. "With the productivity growth we have and 2 percent inflation, one would probably expect to see . . . something between -- perhaps 3 and 4 percent wage [growth, before inflation adjustment] would be normal. Wage inflation has been running at 2 percent. An increase in it might signal some tightening or meaningful pressures on inflation, at least over time. And I would say we're not seeing that."

Or, as she said Monday, "The low rate of wage growth is, to me, another sign that the Fed's job is not yet done."

Naroff thinks wages will be ticking up as the economy moves into the second half of the year -- ust as, in 2012, he thought unemployment would go below 8 percent by election day, when the Fed thought it would still be around 8.5 percent. So he's being contrarian -- again. And the inflation data tells us we should all relax and enjoy it, rather than panic about rates rising because people will get a raise, he argues.

So Friday, of course you'll listen at 8:30 a.m. for the new unemployment rate and monthly job gains. But if you really want to know what will happen next, you should also look for the hourly earnings numbers in the same report. Forecasts for those are beginning to rise a little bit, too.

And incomes are where sophisticated players' attention will be shifting as the unemployment rate drops toward 6 percent and the economy finally begins to really move.

More from MarketWatch

Apr 2, 2014 2:01PM
I haven't gotten a raise in 7 years, still making the same that I was hired in at (but thank God I have a job). This is a small town and there aren't a lot of jobs here.  Still paying more at the pump and in the grocery store.   While the rich get richer.
Apr 2, 2014 2:00PM
Since all this is based on DC numbers, which are CONSTANTLY revised DOWNWARD, because of Obama's White House playing with numbers to give the appearance of a recovery for five straight years now, we can NOT trust a thing coming out of DC. I will believe we are recovering when I see tangible evidence of it in my own wallet ! ! ! ! ! ! ! !
Apr 2, 2014 2:11PM

"People seem to be getting more money. As long as inflation remains in check -- and the price index rose only 0.1 percent both including and excluding food and energy -- it looks like household spending power just may finally be accelerating."


BS. Apparently the author of this article does not buy groceries, put gas in a vehicle, pay for heating fuel, or in general buy anything.


Prices are up well north of 0.1% - they rose more than that in the last month alone. I make a middle class income (nearly 60k) and that is what I've made for going on 7 years now. The bills are paid and then it's hunker down for the month.


BTW I really enjoyed a shopping spree at the dollar general for bread and laundry detergent with my $15 (no sh*t) federal tax refund. I guess the reason the roads are falling apart and the country is in debt up to it's eyeballs is beacsue the $9k I paid in taxes wasn't enough.

Apr 2, 2014 2:08PM

Sorry but this is a no brainer. If you don't increase wages and people can't  afford to buy anything how do you expect the economy to recover and continue on? If wages don't start to increase there will be no improvement, plain and simple.

This is why having so much wealth at the top is a bad thing. I'm not against someone making millions or billions but when the bulk of the wealth continues to be concentrated to a select few it just turns into a vicious downward circle. The wealthy can only buy so much and only need so much. An economy can not be supported on what they spend alone. This is why the middle class is so important. Short term gains for the super rich don't do the economy good in the long run. A strong middle class is needed and in the long run that will actually net those at the top a better, solid, reliable, return. Growing the middle class is the best investment strategy otherwise it is only a matter of time before the train will run out of steam and everything comes to a halt.

Greed continues to blind those at the top of the real picture and their future downfall should the middle class continue to disappear.

At least this is getting more attention and I've seen news of those at the top realizing that they better keep the foundation (middle class) solid by paying more or their towers will fall.

I think its time

Apr 2, 2014 1:47PM
way to state the obvious here. the paycheck earners of this country are already painfully aware of the prevailing wage vs. cost of living scenario. if you want the brainwashed consumer robots to buy more s..* and pay more taxes pay them the wage to do so. 
Apr 2, 2014 2:03PM

"The early signs that the recovery is indeed poised to change gears will be seen in the income numbers,"


Five years is the early stage?

Apr 2, 2014 1:55PM
This article is nothing but Wall Street drivel. Time to face reality, Tim.
Apr 2, 2014 2:05PM
And all of this claimed recovery in progress as Obamacare prepares to suck what little life the economy has left in it. I think prudence dictates that we wait and see before believing a thing coming out of DC. 38 Delays in Obamacare so that voters will be fooled into believing the Democrats spin that Obamacare is not going to damage the economy. Once those delays are gone and we feel the full effect of Obamacare, I suspect we will tailspin into a full fledged Depression, or close to it. STOP the damage NOW. VOTE to repeal Obamacare, or suffer the consequences after the election ! ! ! !
Apr 2, 2014 2:07PM
Here we go, blah' blah' blah' more government puppet media spin on the economy for Obama and the progressive (socialist) liberals!
Apr 2, 2014 2:12PM
Let's have some tax cuts to match the poor incomes,  ok?
And quit letting the big corporations and special interests feast on the bones of the once great middle class.

Apr 2, 2014 2:22PM

Feels like every time I get a raise, the government also raises my taxes.  Then I'll make the same as before.  That's why my paychecks are always the same.


Work hard and give the givernment leeches a raise.

Apr 2, 2014 2:46PM

Anybody who believes this economy is good is just ignorant. The current administration releases only numbers they want you to hear not what the actual numbers are. Inflation is crazy yet the administration does not include the increase in food and energy which just happen to be the two items that have increased in price the most. The administration is having to pump over twenty billion dollars a week into the economy just to keep it from imploding. If we pay one million dollars a day it would take us over fifty thousand years to pay off the current national debt and these idiot's in Washington just keep wasting taxpayers dollars. This country is headed for a major collapse.

Apr 2, 2014 2:14PM

While the statistics stated in the article show a bright future, many of us have had stagnated wages for the past seven or more years. And many have lost jobs/income, taken lower paying jobs, etc. Utilities, food prices, gas prices, etc. have steadily increased against my fixed income; revealing a worsening household budget and financial foundation. The addition of paying more for health care insurance thanks to our National Health care plan, has caused my wife and myself to be on survival mode.

So where are these figures coming from? How are they computed? I really don't believe what this article has said regarding an increase in income unless these figures include the top 1% who have made great gains in income compared to the other 99%. When the wealthiest 400 people in the country make as much as half of the other 99% combined, there is an obvious disparagement in income. And this may explain the rise in average incomes that seems to leave most of us out on the side of the road with our thumbs in the air.

Apr 2, 2014 2:33PM
and a more realistic issue is not enough people even get a paycheck.

those that do have everyone that doesn't on their backs, and the government call this fair.

time for another revolution
Apr 2, 2014 2:38PM

the lack of jobs is the real problem and that is caused by our trade policies that have killed manufacturing in America…thank you to all the free trade supporters that also advocate free everything for those that aren't citizens and citizens that don't work

the root of all evil is liberalism
Apr 2, 2014 2:12PM

Single rail, high speed, personal vehicles that attach. Jobs for generations. Increase in commerce and travel. Exportable.

Where is the vision of our future? Where are the leaders? 

Our politicians, banks, and industries are selling us short. Pathetic stagnation. Americans DESERVE better than what we are getting. 

Apr 2, 2014 2:30PM
Apr 2, 2014 2:16PM
And Inflation?  Stupid article, and unemployment is always the biggest indicator of any "Any" economy! Democrat idiot obamaite!
Apr 2, 2014 2:44PM

Outsourced good paying jobs. Reduced middle class and their income. Wipshood employees to compete with one another. Bring in illegal immigrants. The list goes on. Man will take a cut in pay rather than watching his family starve. Man will also get mean and agree. Just a matter of how much will he take.

I have an interesting report I used to copy and paste to these stories for your enlightenment but MSN has figured out how to deny my story from posting. Sorry. Summery; both political parties are involved and have both endorsed "Workforce 2000" back in the early 80's.

Apr 2, 2014 3:31PM
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