U.S. household nominal incomes are growing at a mostly steady but fairly slow rate, as the tightening labor market produces modest gains in wages.

We believe the U.S. economy is on firm footing, even though economic data have seemed rather mixed of late. Interestingly, there is a wide range of estimates for first-quarter GDP growth. (The first official estimate will be released on April 28.) The Atlanta Fed GDP tracker is below 1.0% now; other gauges range from roughly 1.5% to 2.5%. Our Nowcast for the United States suggests the pace of growth rose steadily throughout the first quarter and exceeded 4% by March 31. What accounts for the difference is the weight that these various assessments place on “soft” versus “hard” data; clearly, the most impressive rises have been in the “soft” confidence measures and, of course, confidence is not directly measured in official GDP accounts.

In our view, what really matters for growth is the pace at which private demand rises. The sub-index from the Atlanta Fed that tracks this variable’s contribution to GDP is currently growing at a 2.6% pace. For this and other reasons, we think the underlying pace of growth of the economy is broadly stable and roughly in line with this number, at around 2%–2.25%.

Looking for a real-income recovery

One of the most important stories to follow, we think, concerns income. U.S. household nominal incomes are growing at a mostly steady but fairly slow rate, as the tightening labor market produces modest gains in wages. Part of the weakness in wage growth is likely demographic, as expensive older workers get replaced by young people who will work for much less. But in the first quarter, the surge in headline inflation meant real incomes actually dropped.

Prior to the financial crisis, households typically reacted to bursts of inflation by either running down their savings or taking on more debt, to allow them to smooth their spending. Post crisis, households have been less willing to do this — and, for poorer households, the opportunity to borrow more has been limited because of greater caution by financial institutions. In the first quarter, credit also became more expensive. Overall, then, households reacted to the real income hit by spending less. If we have this picture right, then the drop in headline inflation that we forecast should allow household incomes to recover, as long as the labor market keeps doing reasonably well. This would allow consumption to bounce back.

U.S. household nominal incomes are growing at a mostly steady but fairly slow rate, as the tightening labor market produces modest gains in wages.

The labor market stays in its trend

In headline terms, the March labor market report was weak. It did not surprise us, though, as we think there are certainly some fragile areas of the economy. Retail employment, for example, continues to look weak, although that is not a revelation given what is happening to retail companies in our era of online commerce. Health care was also weak, as it has been for a few months, although this is likely attributable to the uncertainty over the U.S. policy framework. But despite these soft areas, the labor market remains in an upward trend. The employment ratio continues to improve. The number of long-term unemployed continues to decline. And full-time employment continues to move up.

In other words, beyond the blip of the bad headline, there is really not much to point to that would say the labor market looks significantly worse or that would suggest the trajectory of the economy has changed. We think the Fed sees this as well and regards the data flow as good enough to keep on hiking, but weak enough to keep the pace of hiking measured.


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As the domestic U.S. policy outlook dims, markets take their cue from more substantive signs of change.