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Wages and consumer spending are rising. But are they connected anymore? (+video)

A leading measure of US wage growth is finally accelerating after a long period of stagnation, and consumer spending is showing small signs of life. But increasingly, instead of spending that extra money, Americans are saving and paying down debts

Wages and salaries have been a sticky spot in the economy’s recovery, even as the job market has surged and unemployment has dropped. That’s finally starting to change, but the connection between higher wages and overall economic growth may not be as sturdy as in previous years.

Compensation costs for civilian workers increased 0.7 percent in the first quarter of 2015 and 2.6 percent since April 2014, according to the Labor Department’s Employee Cost Index (ECI), released Thursday. (That was in line with analysts’ expectation of a 0.6 percent rise.) Wages and salaries increased 2.6 percent year-over-year; benefits increased a similar 2.8 percent.

In a separate report, consumer spending in March finally broke its multimonth losing streak, rising 0.4 percent.

Economists consider the ECI the most reliable overall gauge of wage costs out there, both because of its longer sample period and because it measures forms of compensation beyond hourly wage, including commissions and benefit costs. And it’s been accelerating over the past year. “The employment costs index has increased at a strong pace for four consecutive quarters now,” Barclays Research economist Blerina Uruçi writes in an e-mailed analysis. “We expect activity to continue expanding at a solid rate for the rest of this year … and we think the unemployment rate will continue to fall. As a result, we expect wage growth to rise gradually this year, reflecting continued labor market improvement.”

Higher wages, of course, are good news for America’s workers. Before the Great Recession, they also were unqualified good news for the growth of the overall economy, says Diane Lim, an economist with the Committee for Economic Development in Washington, in a phone interview. “There was a co-dependence there. Employers wouldn’t hire if people weren’t buying,” she says, but when spending picked up business had more money to hire and pay workers, and the positive feedback loop continued.

This recovery, though, has been different. The employment market has improved considerably over the past year, with wages slowly beginning to follow, but it hasn’t translated into more consumers going on big spending sprees. Spending has been sluggish to kick off the year. According to data released earlier this week, GDP lurched to just 0.2 percent growth in the first quarter of this year, and consumer confidence hit its lowest level in four months.

“Once the recovery took hold, we started to realize that the labor market improving was no guarantee that consumer demand would pick up the way we’re used to seeing,” Ms. Lim says.

Part of the reason: Instead of using extra cash from better wages (and lower gas prices) to go shopping, Americans are saving and paying down debt. The US savings rate in the first three months of 2015 increased to 5.5 percent – its highest level since the end of 2012.  Lim attributes the shift to changing demographics: Millennial adults are playing a bigger and bigger role in the economy as they age, and there’s evidence that they tend to be more mindful of their savings than other age groups. But older generations, too, having coming through the deep recession and a credit crisis, may be changing their spending habits.

There are some early signs that consumers are loosening their purse strings again this spring. March’s consumer spending report, though below economists’ expectations, posted its biggest increase since November, and the savings rate ticked slightly lower in February.

However, “there’s higher caution at the population at large,” Lim says. “That’s good over the long term, we weren’t saving enough. But it looks bad  [from a data standpoint] in the short and medium term.”

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