The squeeze on American pocketbooks

Americans are working as hard as ever, but their paychecks aren't keeping pace with rising inflation. That means trouble for their pocketbooks - and for an economy that's fueled by their spending.

Indeed, after two years of a "jobless recovery" following the 2001 recession, the US economy now faces something equally unsettling: a "wageless recovery."

Several government reports this week tell the story. For the first year since the Great Depression, the personal savings rate went negative in 2005. Pay and benefits, meanwhile, rose just 3.1 percent last year - the lowest rate since 1996 and not enough to outpace a 3.4 percent jump in the consumer price index. Is there any relief in sight?

None came Thursday, as the government reported a decline in worker productivity for the closing months of last year, a trend that could limit future wage growth.

The outlook isn't all discouraging, but a four-year-old economic expansion is clearly struggling to maintain its momentum. The reason: Americans are being squeezed from both sides of the household ledger. On the income side, wage growth has been historically low for a period of economic recovery. On the spending side, energy prices and interest rates are higher.

Meanwhile, home-equity loans are no longer an easy way out. Soaring property values that turned many houses into two-story ATM machines appear to be flattening out or even falling.

"If the housing market softens ... American consumers will then have little choice other than to bring spending and saving back into more prudent alignment with income," said Stephen Roach, a Morgan Stanley economist, in a recent analysis. "The combination of a relatively jobless and wageless recovery puts tremendous pressure on American households."

Economists aren't expecting a recession. But since consumers account for more than two-thirds of the nation's economic output, the health of American wage earners is a central question mark hanging over this year's economy.

Other parts of the economy may help pick up the slack. With the world economy expanding, exports should contribute solidly to gross domestic product (GDP). And many economists expect to see businesses invest more of their record profits in new equipment and facilities. That, in turn, could mean more jobs and paychecks. Forecasters generally expect strong economic growth in the first few months of this year, after hurricanes and slower consumer spending dragged down GDP growth to a 1 percent annual pace for the last three months of 2005.

Indeed, the Federal Reserve remains more concerned about possible inflationary pressures than about economic growth falling below a normal pace of about 3 percent. Earlier this week, the Fed moved to constrain those pressures for the 14th time since June 2004, bringing its short-term interest rate to 4.5 percent. Another rate hike is considered likely in March.

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