American households have seen their purchasing power increase

Finance

Rudi_suardi | E+ | Getty Images

Americans have seen their buying power rise for a year amid falling inflation and a strong job market, which might be welcome news for households struggling to afford everyday purchases.

The average worker in the private sector saw their real hourly earnings grow 0.8% from May 2023 to May 2024, according to U.S. Bureau of Labor Statistics data.

“Real” earnings measure the net growth in workers’ wages after inflation. In other words, the average worker in the private sector got a net raise from May 2023 to May 2024, after accounting for price growth in consumer goods and services. Their paycheck today buys more than it did a year ago.

The trend of growth in annual real earnings has persisted since May 2023, according to BLS data. It’s been especially strong for rank-and-file workers who work in non-managerial roles, data shows.

That marks a reversal from April 2021 to April 2023, when inflation spiked and eclipsed growth in the average worker’s paycheck.

More from Personal Finance:
How to get a lower credit card interest rate
Tax strategies after a prolonged job layoff
How to tap your home equity

“The last year of increases in real wages is a large and important step forward for working families,” said Chris Tilly, a professor and labor economist at the University of California, Los Angeles.

“It means that they can buy more while putting in the same number of hours of work,” he added. “Or, they can decrease the total number of household work hours — for example, cutting down from two jobs to one, or having one earner reduce to part-time in two-earner families — while buying an equivalent amount.”

What happened with real earnings

Real earnings tend to grow at a positive rate during “normal” times, said Maximiliano Dvorkin, an economic policy advisor at the Federal Reserve Bank of St. Louis.

However, dynamics in the pandemic-era U.S. economy threw that equilibrium out of whack, economists said.

For one, inflation surged, peaking at a four-decade high in mid-2022.

Meanwhile, the labor market was white-hot as the U.S. economy reopened from its pandemic-induced lull. Job openings hit a record high, unemployment was near a historical low, and workers quit at record levels amid the ease of finding higher-paying gigs elsewhere.

For example, job openings peaked at more than 12 million in March 2022, up from roughly 7 million before the pandemic. That month, the average worker saw their pay growth spike to about 6% annually. Before the pandemic, average raises hadn’t exceeded 4%, according to the BLS, which tracks such data back to 2007.

The average worker got a bigger raise than they had in decades, but the raise wasn’t enough to eclipse inflation, which peaked at more than 9% in June 2022. That resulted in two years of falling real wages.

However, inflation has since eased and the labor market remains strong, though it has broadly cooled since 2022, roughly to its pre-pandemic baseline.

“What we observe over the last year is a return to more normal economic conditions after the disruptive forces of the Covid pandemic waned,” Dvorkin said.

“This is good news for consumers,” since it generally equates to an increase in their well-being over time, he added.

Average “nominal” pay (i.e., before inflation) for all workers is up almost 23% to $34.91 an hour since January 2020. Pay has grown even faster for rank-and-file employees, rising over 25% to $30 an hour.

The consumer price index, a key inflation measure, is up a smaller 21% in that time.

While consumer sentiment has been improving, workers are still sour on the U.S. economy. The disconnect between the economy’s overall strength and its perceived weakness among households has come to be known as a “vibe-cession.”

Articles You May Like

Citigroup tops expectations for profit and revenue on strong Wall Street results
‘Rentvesting’ can be ‘a good way to get into the property market,’ economist says. Here’s how it works
The NFL is open to private equity team ownership of up to 10%, Commissioner Roger Goodell says
Burberry shares drop 15% after the luxury giant issues profit warning and replaces CEO
GM’s 2025 EV production capacity target in doubt after Barra comments