welcom to America today with a new article about Why is the economy so strong? New hires are spending more and upgrading their lifestyles
Economists have been scratching their heads over how Americans can continue to prop up the economy with their spending despite high interest rates, persistent inflation, dwindling savings and rising debt.
There may be a simple answer: Jobs.
Payroll growth has been stunningly strong this year. Most people who land new jobs have been opening their wallets, with many making big lifestyle changes that include buying a new house or car, according to a recent survey by ZipRecruiter, a leading job site.
Fifty-seven percent of workers hired in the last six months ramped up their spending after they got a new position, according to the ZipRecruiter poll results, which were provided exclusively to America today. Thirty-four percent maintained their previous spending levels and 10% said they reduced their outlays.
The online survey, conducted in February and March, drew responses from 1,500 workers who started their jobs during the previous six months.
Many of those who ratchet up their purchases go big. Forty-four percent of the recent hires said they plan to upgrade their lifestyle by moving to a nicer neighborhood or larger home, buying a new house or car, or transferring their children to better schools, the survey shows.
While workers who stay in the same job and get raises also tend to spend more, those who snag new positions typically see bigger pay bumps. Of the surveyed workers who switched jobs, 70% received higher pay and half of that group notched double-digit wage gains.
What drives wage growth?
Earnings growth has surged since the pandemic because of severe labor shortages that have eased in recent months. For a couple of years, those pay increases were outpaced by inflation, leaving households struggling to keep up. Since last May, however, average pay gains have topped price increases, allowing workers to stretch their paychecks further even though pay increases have gradually slowed.
“For the past 10 months, real (inflation-adjusted) wage growth has been positive, so more workers and job switchers are seeing their purchasing power increase,” says ZipRecruiter’s chief economist Julia Pollak.
How is the job market in the USA right now?
U.S. employers added a booming 303,000 jobs in March and an average of 276,000 the first three months of the year, up from an average of 251,000 in 2022. Job growth has been expected to slow this year amid elevated inflation and interest rates. But healthy pay increases have fueled spending, which, in turn, has juiced the economy and labor market, creating a virtuous cycle.
Sturdy job growth by itself can boost consumer purchases because more people are working. That effect is compounded if workers are shifting to higher-paying positions.
What happened with the Great Resignation?
During the Great Resignation, as record numbers of Americans changed jobs amid the labor crunch, median yearly wage growth for job switchers peaked at 16.4% In June 2022, according to payroll processor ADP. Since then, median pay increases have steadily fallen as labor shortages have waned, bottoming out at a still-solid 7.2% in January.
But pay increases have spiked again in the past two months, with the annual rise hitting 10% in March, the highest since July 2023, ADP figures show.
The surge “is a signal the labor market is still competitive amongst employers looking for talent and also lucrative for employees looking for pay increases elsewhere,”says Liv Wang, lead data scientist at the ADP Research Institute.
Job changers are scoring the biggest pay gains in construction, financial services and manufacturing, Wang says.Why is the economy so strong? New hires are spending more and upgrading their lifestyles
What are the challenges consumers face?
The willingness of new hires to splurge is more than offsetting other hurdles households face.
The Federal Reserve’s key interest rate still hovers at a 23-year high, driving up mortgage rates and other borrowing costs. Inflation is at 3.5%, still well above the Fed’s 2% goal. Americans’ pandemic-related savings have mostly run dry. And low- to middle-income households are burdened by record credit card debt.
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The bottom line: Even if the Fed pushes back interest rate cuts to later this year because of high inflation, the twin forces of strong job growth and consumption could keep the economy humming. Consumer spending makes up about 70% of economic activity.
A core measure of retail sales surged in March and, according to Oxford Economics, likely translates to another robust annualized consumer spending gain of 3% in the first quarter.
“If we continue to see this labor market strength, it could continue to prop up (economic) growth, Pollak says.
Background of the Strong Economy
The strong economy that the US is currently experiencing now is the result of government deficit spending. The economy is in a recovery phase, so the effects of the government borrowing money and spending it are producing a multiplier effect on national income. The fact that the government has run a deficit isn’t a big secret.
News reports and articles are constantly discussing how the government is trillions of dollars in debt, but one thing that they fail to realize is that the government debt is the people’s financial asset. In order for the government to run a debt, there must be investors who are willing to purchase government bonds. With the purchase of these bonds, people now have the bonds as a financial asset but are giving up some of their money in the form of a loan.
For those who are skeptical about how government bonds are a financial asset, it is simply credit market borrowing. This is a concept that most people understand because it is the same as taking out a loan to buy a new house or car. It is a scary thought at first because someone is loaning a large sum of money, but when it comes down to it the effects are far less burdensome.
With credit market borrowing, there is an increase in future income and in this case, the government will be using the bonds to facilitate long-term economic growth. Step one is to get the economy to full employment where the output is maximized. The US is currently doing this and it will continue as long as the economy is in a recovery phase.
Step two is the crucial one where the increased spending begins. Step three is where the government takes surpluses to eliminate the accumulated debt. Step four is the termination of debt and if done correctly, the result will be a booming economy. This is the same procedure that an individual or family would use when taking out a loan to facilitate financial progression and it is a logical mode of thinking.
Importance of New Hires in Economic Growth
In the initial stages of a budget deficit, an injection of funds (by cutting taxes and/or increasing government spending, G) can help to create jobs. Since a budget deficit is the amount by which government spending (G) exceeds tax revenue (T), such an injection implies an increase in government spending greater than the reduction in spending, which is defined as G-T. It will thus increase AD and have the same effects as any other injection.Why is the economy so strong? New hires are spending more and upgrading their lifestyles
This will lead to an increase in real national output, creating employment and economic growth. With an increase in spending, firms’ sales and profits will rise, and to meet the extra demand, they will require more labor. This will lead to an increase in employment as firms hire workers to meet the higher level of demand. Government workers will also need to be hired to provide the additional government services. Firms will make these hires from the existing pool of unemployed workers.
An increase in employment will lead to an increase in the marginal propensity to consume as workers have more disposable income. There will be a multiplier effect as the increase in consumption will stimulate further increases in AD. The increase in employment in the current year and the expectations of future increases in demand will cause firms to invest in capital to increase production. This will further increase AD and economic growth.
The new jobs created and the increase in capital investment will push the economy towards full employment. This is a highly favorable outcome because once the economy reaches full employment, aggregate supply becomes the binding constraint on the level of national output. Full employment is defined as the level of employment at which anyone who is willing and able to work at the existing wage rate can find a job. At this point, economic growth can only be achieved in the long run by increases in aggregate supply.
This is due to the fact that increases in AD beyond the level of aggregate supply will cause inflation. However, it is arguable that in an economy facing a reasonable level of aggregate demand, government intervention can create ideal conditions for an increase in AS towards the new full employment level. This is called demand-side reflation creating supply-side growth.