March average wages showed an increase of .03 percent over February’s level in what analysts hope is a sustainable upward trend. In spite of lower consumer spending, there is a feeling of optimism that increased demand will drive consumer spending higher.
The recent wage increase reflects the greatest level of growth in nearly nine years, and is fueling a lot of positive sentiment in the sector overall. Increased wages often equal increased spending, meaning we are likely to see a boost in other sectors in the near future.
Record Uptick in March Wage Levels
Market experts predict that the increase in household income will bring about an increase in an otherwise anemic consumer spending sector. The average hourly wage remains basically unchanged in its rate of growth. The increase of 2.7% in March of 2017 over the same month in 2016 shows no change from the rate from 2015 to 2016. It will be interesting to see how increased demand and higher consumer confidence affects this metric.
For now, the good news is the wage increase. Job security sentiment is strong, as is the level of satisfaction consumers are feeling about their personal financial outlooks.
To date, these markers have not yet translated into increased spending. With higher wages, however, the tide is expected to change as increases in household budgets feel fuller heading into the summer season.
Rate Hikes this Summer?
The Fed is also expected to announce an interest rate hike in June, although one is not expected this month. In fact, some analysts are predicting two back-to-back hikes this summer. Sources cite the large bump in wage levels that are expected to fuel consumer demand.
The overall outlook of consumers is also rising, as many households have recovered in these eight years following the end of the 2007-2008 recession. Additionally, inflation should continue to remain at or below 2% for the foreseeable future, especially into late spring and summer.
Inflation Trends
Currently, inflation fell below 2% in March per the Federal Reserve’s preferred benchmark of consumer prices indexed to purchases. It was reported that following the March Fed meeting that 2% growth is their desired rate of inflation. Analysts say this level will be sustained at least in the near term, which is also good news for consumers.
Without inflationary pressures pushing spending downward, there is a real possibility for continued growth through year’s end. Inflation also effects real wages, so the double whammy of lower wages and higher real costs of consumer goods is never optimal. As it looks like inflation will stay within the favorable range, consumers should feel the benefits of their wage increases in increased purchasing power.
Expected Impacts on the Stock Market
Consumers are expected to increase their purchasing with the larger paychecks that are projected to last at least through summer; in turn, this is causing retail stocks to trend higher.
Retail outlets trended higher on the wage report, and as consumer confidence continues to increase, larger revenues should begin to match the positive sentiment that has been widely reported. Another sector that will reap the rewards of this trend is the restaurant industry. People love to go out to eat and when they have a little extra money in their wallets this is often how they choose to spend it.
Disposable Income Levels
Increases in disposable income (net earnings after tax) is what fuels greater spending, and March saw an uptick of .05% over the previous month; an increase not matched since December of 2015.
Increased income coupled with greater consumer confidence will likely spur on increases in spending on daily purchases along with durable goods and larger items. Auto sales have lagged, and it will be interesting to see if purchases increase this summer.
All in all, this is great news for both consumers and businesses, and retail outlets especially will likely see significant gains over the summer months. Travel expenditures should also increase at a significant rate as people book more summer vacations with their higher level of disposable incomes. 2017 is looking to shape up to a year of solid growth across many sectors.
Regards,
Ethan Warrick
Editor
Wealth Authority
