American Incomes Head Down, Threatening Recovery in Spending

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http://forexnews-4all.blogspot.com/2009/08/american-incomes-head-down-threatening.html
Household income in the U.S. is weakening as the influence of the
government’s stimulus plan wanes, prompting economists, Federal
Reserve officials and a Nobel laureate to warn that consumer spending
may struggle.
“Consumers have started to change their behavior and they are going to
save more,” said Richard Berner, co-head of global economics at Morgan
Stanley in New York and a former researcher at the Fed. “You have
pressure on wages, you have employment still declining.”
Wages and salaries, which drive recoveries in spending, fell 4.7
percent in the 12 months through June, the biggest drop since records
began in 1960, according to Commerce Department figures released
yesterday. The Obama administration’s tax cuts, extended jobless
benefits and a one-time Social Security bonus have helped mask the
damage done by the worst employment slump since the Great Depression.
Personal incomes, which include interest income, dividends, rents and
other payments as well as wages, tumbled 1.3 percent in June, more
than forecast and the biggest drop in four years, yesterday’s Commerce
report showed. Excluding the effects of the stimulus plan, June
incomes would have dropped 0.1 percent after no change in May,
according to the report. In May, one-time additional payments to
Social Security recipients boosted incomes 1.3 percent.
One of every 10 American workers will be without a job by early 2010,
economists project, shaking the confidence of those still on payrolls
and discouraging spending. It may take as long as 15 years for
consumers to fully repair finances battered by the decline in home
values, stocks and employment, said Edmund Phelps, winner of the Nobel
prize in economics in 2006.
Shrinking Net Worth
Decreasing pay is not the only hurdle for consumers. Plunging home
prices and stocks reduced household net worth by a record $13.9
trillion from the third quarter of 2007 through this year’s first
quarter, according to figures from the Fed.
“Households are going to have to do an awful lot of rebuilding of
their wealth,” Phelps, a professor at Columbia University in New York,
said this week in an interview on Bloomberg Television. “Even if that
rebuilding goes on at a pretty good clip, it will take 12 or 15 years
for households to get to the wealth level that they had several years
ago. Consumer demand is going to take a long time to rebuild to normal
levels.”
In the second half, incomes and spending will be hurt by the loss of
transitory factors such as lower fuel prices, decreased tax rates and
the one-time payment to retirees, William Dudley, president of the Fed
Bank of New York, said in a speech last week.
Save More
“Consumer spending is unlikely to rise much faster than income”
because of the need to boost savings, he said. “Weak income growth
will be an effective constraint on the pace of consumer spending.”
Companies continue to trim expenses, threatening further cuts in pay
and benefits. Tenneco Inc., the world’s largest maker of vehicle-
exhaust systems, temporarily lowered pay and hours worked to reduce
labor costs by 10 percent. Earlier this year, the Lake Forest,
Illinois-based company suspended contributions to employees’ 401(k)
retirement accounts and cut pay for the top 50 executives.
Government assistance such as the “cash-for-clunkers” program will
help postpone the inevitable increase in savings and slowdown in
spending as more baby boomers