Paychecks found to trail rise in prices

Household buying power has been cut by about 1.5%

May 13, 2008|By Gene Meyer | Gene Meyer,McClatchy-Tribune

KANSAS CITY, Mo. - There's a simple reason why it might feel as if your paycheck is gone before you get it.

Put simply, prices for the stuff we buy are rising faster than our incomes.

That's exactly what's been happening nationwide since at least October, according the Economic Policy Institute.

Researchers at the nonpartisan Washington think tank calculate that paychecks - which a year ago were rising about 1 percent faster than prices - now trail those prices by a half-percentage point or more, largely because of soaring food and fuel prices.

The bottom line: Household buying power has been cut by roughly 1.5 percent.

Likely to continue

The erosion is likely to continue, and perhaps worsen, for at least a couple of years, said Larry Mishel, the institute's president.

"Now, wages are slowing down faster, but food and energy prices are driving costs even higher," he said.

It's exactly the sort of trend that fuels talk about recession. And those grinding economic pressures are sure to shape how households use the wave of economic stimulus payments - those $300 or larger tax rebate payments that started hitting bank accounts this month.

More checks are in the mail. And even their strongest supporters acknowledge that the jury is still out on their ultimate effect on the economy.

"We're facing some pretty strong head winds," Treasury Secretary Henry M. Paulson Jr. said last week in Kansas City, where he watched the first batches of the paper rebate checks being printed.

Paulson said the rebates should perk up the economy by later this summer and take some sting out of higher prices for food, fuel and health care. He added that the stimulus would lead to the creation of 500,000 jobs by the end of the year.

Others are less certain about their long-term effect.

In terms of providing a boost to the economy, "they're a good idea if the money goes to people who are inclined to spend it," Mishel said. "But they won't correct the long-term squeeze."

A survey by online credit-card information provider CreditCards.com suggests that only about one in 10 consumers intends to spend the economic stimulus as impulsively on discretionary items as federal officials hope.

Lower-income consumers, those making $30,000 or less, plan to spend the money, but on such things as groceries, utilities and other necessities, the survey found. About half of all the consumers quizzed say they will simply save the money or use it to pay down debt.

A similar survey by the American Institute of Certified Public Accountants found that single consumers are more apt than others to save their stimulus money. Working moms with children are most apt to pay debts. And retirees and married couples are most apt to spend the money.

The stimulus payments certainly come at a crucial moment for the economy.

Anemic growth

The Commerce Department reported that consumer spending grew at an anemic 1 percent annualized rate during the first three months of this year, down from 2.9 percent in 2007 and 3.1 percent in 2006.

Policymakers disagree on whether such slow growth is tipping the U.S. into a recession.

Based on past history with similar rebates in 2001 and 2003, most households will spend between one-third and two-thirds of the stimulus payments, which so far are running an average $920, Paulson said.

Cumulatively, those payments plus business tax breaks in the stimulus plan are a roughly $150 billion shot in the arm, equal to about 1 percent of the nation's economic output and enough to make a "real difference," Paulson said.

But the Economic Policy Institute notes that national economic growth since the last recession ended in November 2001 has been the weakest for any comparable growth cycle since World War II. As a result, working families, for the first time in history, are heading into a new recession with lower incomes and fewer resources than when the last one started.

"Families are facing a daunting challenge to their living standards," EPI researcher John Irons said. "This is bad news not just for them, but for the whole economy."

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