By most measures 2014 appears to be the year that the U.S. economy finally broke out of its rut. The second and third quarters were the best back-to-back quarters of growth in over a decade. The strength in the economy finally extended to the labor market; last year the United States created new jobs at the fastest pace since 1999. Nor did these changes go unnoticed by consumers. By year’s end confidence was at its highest level since 2007.
Unfortunately, there was one piece missing: wage growth. Despite all the improvements in the labor market, wages have failed to accelerate in a meaningful or sustained fashion.
While jobs and hours worked have rebounded, hourly wages haven’t. In December, hourly wage growth decelerated to 1.70%, the slowest pace since October 2012. Even by the subdued standards of the post-crisis environment, this was disappointing.
Disposable income, a broader measure of income, has improved, but it is still a long way from its historical average. The most recent figure showed disposable income rising a little over 4% from a year earlier. Since 1960 the average rate has been roughly 6.8%.
Thanks to falling inflation, the most recent numbers on real (inflation adjusted) disposable income look a bit better. That said, we have yet to see a sustained improvement. In November real disposable income accelerated to 2.9% year-over-year. But looking at 2014 overall, the trend is less impressive. Last year real disposable income growth averaged 2.3%, roughly a full percentage point below the long-term average.
Assuming last year’s pace of job creation is maintained, we would expect further improvement in wage growth as the slack in labor markets continues to erode. However, even with a cyclical improvement in the job market, wage growth may still not reach its long-term average for a sustained period.