WHY JOBS, WAGES AND SAVINGS MEAN WEAKER PROFITS /

Why Jobs, Wages and Savings Mean Weaker Profits

Weak wage growth has Americans saving less. That can’t go on forever.

By Justin Lahart


SO MUCH FOR FRUGALITY
Personal Savings Rate

The U.S. economy has reached a turning point: If companies don’t start paying employees more soon, consumer spending may slow. But the alternative—faster wage growth—would raise companies’ costs.

Either way, it is hard to very optimistic about where profits are heading.

July was another good month for hiring, with the Labor Department reporting that the U.S. added another 209,000 jobs, and that the unemployment rate slipped to 4.3%. Yet wage growth remains uninspired, with average hourly earnings up just 2.5% from their year-ago level, about the level it has been at all year. The strong jobs number is further evidence that wages will rise, as most economists believe. But they have been believing that for a while now.

Without solid wage increases, Americans are maintaining their spending by saving far less than previously thought. Last week’s gross domestic product report showed that personal saving rate—money saved as a share of after-tax income—came to just 3.8% in the second quarter, while the first-quarter saving rate was revised to 3.9% from 5.1%. Up until a year ago, the rate was hovering between 5% and 6%.

The saving rate isn’t quite as low as it got during the housing bubble, and its drop doesn’t appear to stem from increasing indebtedness, points out J.P. Morgan Chase economist Michael Feroli. That doesn’t mean it isn’t worrisome. Consumer spending has been almost the only driver of the economy over the past year, but it appears consumers are reaching their limit unless incomes grow faster.

More jobs numbers like Friday’s will help but the declining savings rate shows that jobs growth only goes so far. Without wage growth, U.S. companies may struggle to increase their sales.

The alternative is that employers, responding to a tighter labor market, start paying employees more, giving them the wherewithal to spend more. That would increase labor costs and, with companies struggling to find new ways to increase productivity, likely put further pressure on profit margins.

The worst scenario for profits is that wages go up but people put their raises in the bank until their savings rate returns to levels that prevailed until about a year ago. That might actually count as a welcome long-term development for the economy, but for corporate bottom lines, not so much.