Why Those Bigger Paychecks Don’t Feel as Good as You Thought They Would

Weekly earnings were rising at the fastest rate since the recession ended, but inflation-adjusted gains remain lackluster

By Eric Morath

Americans’ paychecks are rising at the fastest rate since the recession ended, but that’s done little to spark stronger spending at stores and restaurants.

One explanation is that rising prices mean consumers don’t feel much richer than they did a year ago.

Median usual weekly earnings for full-time workers rose 3.9% in the first quarter from a year earlier, the Labor Department said Tuesday. That was the best gain since late 2008. (Historical earnings data is adjusted for seasonality.)

Nearly eight years after the recession ended, weekly pay is nearing the 4% annual growth pace that was reached in the prior two economic expansions. It’s a sign the economy has returned to full health, and theoretically should give consumers confidence to go out and spend.

Wage gains had slowed sharply in the early days of the economic expansion, which began in mid-2009, because a high number of unemployed Americans allowed companies to fill positions without offering higher wages.

But when adjusting for inflation, paychecks are growing more slowly than they were a year ago. When factoring in price changes, weekly earnings rose just 1.2% from a year earlier. That matches the fourth quarter of 2016 as the smallest advance since late 2014.

Consumer inflation had slumped to near zero during much of 2015 because energy costs decreased sharply. That made the spending power of historically modest pay increases feel pretty good.

But now costs are rising again, especially for essentials such as gasoline, rent and medical care.

That gives Americans less leeway to spend more at retailers. Even when not adjusting for inflation, sales at stores, restaurants and online retailers declined in February and March. And lackluster consumer spending is a primary reason many economists project the economic expansion to have slowed sharply to start the year.

The government’s first reading on economic output is due out April 28.

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