Rush at End, but Sales Fall Short (NYTimes, 12/26/06)

December 26, 2006
Rush at End, but Sales Fall Short
By MICHAEL BARBARO
There is always next year.

Shoppers swarmed discount stores and mobbed suburban malls over the crucial holiday weekend, but the final burst of buying is expected to fall short of retailers’ expectations.

Visa USA, the credit card company, said yesterday that it would lower its closely watched forecast for holiday spending. Based on purchases by credit and debit card holders, Visa said sales rose 6.5 percent in November and December, compared with the same period last year, down from its initial forecast of a 7.5 percent gain.

The company’s unexpected downward revision — and the millions of dollars in lost sales it represents — could have broad implications for the nation’s merchants, who count on purchases during the holiday season for nearly half of their business.

For consumers, it will probably translate into even deeper discounts over the next week, as they begin redeeming millions of gift cards.

Industry analysts said that, after a strong, discount-induced start the day after Thanksgiving, consumer spending slowed in December and never fully recovered. A soft housing market and high fuel prices pinched consumer spending, while unseasonably warm temperatures damped sales of cold-weather clothing from New York to Chicago.

“We knew spending would be slower than last year,” said Wayne Best, senior vice president of economic analysis at Visa USA. “But it seems to be even slower than we predicted.”

The lackluster performance, well below the 8.3 percent increase in 2005, came despite respectable last-minute sales over the weekend.

ShopperTrak RCT, which measures purchases at 45,000 mall-based stores, said spending rose 22.5 percent on Friday and Saturday, compared with the same period last year, hitting $16.3 billion.

A founder of the research firm, Bill Martin, called it a “very strong close to the holiday shopping season.”

But it was probably not enough to prop up the entire season. Marshal Cohen, chief retail analyst at the NPD Group, an influential research firm, said retailers had handicapped themselves by dangling even deeper discounts this November than last — encouraging consumers to finish their shopping earlier than ever.

According to NPD, 40 percent of Americans had started shopping by Thanksgiving weekend. “That is a huge increase over the prior year,” Mr. Cohen said.

The early shopping theory was supported, in part, by data from ShopperTrak, which said consumers spend more on the day after Thanksgiving, known as Black Friday, than on any day leading up to Christmas. That is a reversal from previous years, when the Saturday before Christmas was the biggest shopping day of the year.

Retailers turned Black Friday into a fierce game of one-upmanship this season, with dozens of malls opening at midnight to compete with discount retailers, only to be outdone by CompUSA, which began ringing up sales at 9 p.m. on Thanksgiving.

Since then, Mr. Cohen said, customer traffic at the nation’s stores has slid.

Those who did shop spent less, according to Visa USA. From Dec. 1 to Dec. 24, it said, the cost of the average purchase dropped by 1 percent. When customers did splurge, it was on electronics, appliances and home furnishings — which emerged, to Visa’s surprise, as the single biggest area of growth this holiday season.

Data from Visa is considered a reliable gauge of the economy because $17 out of every $100 is spent on its 500 million cards. Like monthly retail sales reports from the Department of Commerce, Visa’s holiday forecast includes spending on gasoline, grocery stores and restaurants.

Faced with a so-so December, retailers did their best to drum up business this last weekend. Best Buy opened at 7 a.m. and dangled scores of Christmas Eve specials like a $229 L.C.D. television and 50 percent off all HBO DVDs.

Circuit City offered Sunday-only specials like a 5.1 megapixel digital camera for $80 and gave away $100 gift cards for every purchase of $1,000 or more.

Last-minute discounts lured Kim Clark to a Wal-Mart in Hamden, Conn., on Christmas Eve.

“It’s never too late,” said Ms. Clark, a 45-year-old mother, as she spent $89 on toys like an Aquadoodle Sing ’n Doodle, one of the season’s hottest preschool products.

“I just hope my bank does not prosecute,” she said.

To make up for disappointing pre-Christmas sales, stores are now focusing on those shoppers holding gift cards. Retailers like Coach and Bloomingdale’s are introducing dozens of new products this week to encourage shoppers to spend their gift cards before the year is over.

Wal-Mart, whose sales have lagged competitors all year, appealed directly to plastic-wielding shoppers in its circular yesterday: “Got a gift card?” it read. “Get your gift.”

Rush at End, but Sales Fall Short (NYTimes, 12/26/06)

December 26, 2006
Rush at End, but Sales Fall Short
By MICHAEL BARBARO
There is always next year.

Shoppers swarmed discount stores and mobbed suburban malls over the crucial holiday weekend, but the final burst of buying is expected to fall short of retailers’ expectations.

Visa USA, the credit card company, said yesterday that it would lower its closely watched forecast for holiday spending. Based on purchases by credit and debit card holders, Visa said sales rose 6.5 percent in November and December, compared with the same period last year, down from its initial forecast of a 7.5 percent gain.

The company’s unexpected downward revision — and the millions of dollars in lost sales it represents — could have broad implications for the nation’s merchants, who count on purchases during the holiday season for nearly half of their business.

For consumers, it will probably translate into even deeper discounts over the next week, as they begin redeeming millions of gift cards.

Industry analysts said that, after a strong, discount-induced start the day after Thanksgiving, consumer spending slowed in December and never fully recovered. A soft housing market and high fuel prices pinched consumer spending, while unseasonably warm temperatures damped sales of cold-weather clothing from New York to Chicago.

“We knew spending would be slower than last year,” said Wayne Best, senior vice president of economic analysis at Visa USA. “But it seems to be even slower than we predicted.”

The lackluster performance, well below the 8.3 percent increase in 2005, came despite respectable last-minute sales over the weekend.

ShopperTrak RCT, which measures purchases at 45,000 mall-based stores, said spending rose 22.5 percent on Friday and Saturday, compared with the same period last year, hitting $16.3 billion.

A founder of the research firm, Bill Martin, called it a “very strong close to the holiday shopping season.”

But it was probably not enough to prop up the entire season. Marshal Cohen, chief retail analyst at the NPD Group, an influential research firm, said retailers had handicapped themselves by dangling even deeper discounts this November than last — encouraging consumers to finish their shopping earlier than ever.

According to NPD, 40 percent of Americans had started shopping by Thanksgiving weekend. “That is a huge increase over the prior year,” Mr. Cohen said.

The early shopping theory was supported, in part, by data from ShopperTrak, which said consumers spend more on the day after Thanksgiving, known as Black Friday, than on any day leading up to Christmas. That is a reversal from previous years, when the Saturday before Christmas was the biggest shopping day of the year.

Retailers turned Black Friday into a fierce game of one-upmanship this season, with dozens of malls opening at midnight to compete with discount retailers, only to be outdone by CompUSA, which began ringing up sales at 9 p.m. on Thanksgiving.

Since then, Mr. Cohen said, customer traffic at the nation’s stores has slid.

Those who did shop spent less, according to Visa USA. From Dec. 1 to Dec. 24, it said, the cost of the average purchase dropped by 1 percent. When customers did splurge, it was on electronics, appliances and home furnishings — which emerged, to Visa’s surprise, as the single biggest area of growth this holiday season.

Data from Visa is considered a reliable gauge of the economy because $17 out of every $100 is spent on its 500 million cards. Like monthly retail sales reports from the Department of Commerce, Visa’s holiday forecast includes spending on gasoline, grocery stores and restaurants.

Faced with a so-so December, retailers did their best to drum up business this last weekend. Best Buy opened at 7 a.m. and dangled scores of Christmas Eve specials like a $229 L.C.D. television and 50 percent off all HBO DVDs.

Circuit City offered Sunday-only specials like a 5.1 megapixel digital camera for $80 and gave away $100 gift cards for every purchase of $1,000 or more.

Last-minute discounts lured Kim Clark to a Wal-Mart in Hamden, Conn., on Christmas Eve.

“It’s never too late,” said Ms. Clark, a 45-year-old mother, as she spent $89 on toys like an Aquadoodle Sing ’n Doodle, one of the season’s hottest preschool products.

“I just hope my bank does not prosecute,” she said.

To make up for disappointing pre-Christmas sales, stores are now focusing on those shoppers holding gift cards. Retailers like Coach and Bloomingdale’s are introducing dozens of new products this week to encourage shoppers to spend their gift cards before the year is over.

Wal-Mart, whose sales have lagged competitors all year, appealed directly to plastic-wielding shoppers in its circular yesterday: “Got a gift card?” it read. “Get your gift.”

An Economy of Extremes (NYTimes, 12/26/06)

December 26, 2006
An Economy of Extremes
By EDUARDO PORTER
Economists have long waxed lyrical about a “Goldilocks economy”— one that is not too hot, not too cold.

In this ideal world, the economy is running so smoothly that there is little risk of it overheating and pushing inflation higher — forcing the Federal Reserve to raise interest rates. Nor is the job market weakening, threatening to plunge the economy into the icy bath of a recession.

The “just right” economy is not often achieved, of course, but lately this bedtime story has taken a particularly tricky turn: it is both too hot and too cold.

The housing market has fallen into a deep freeze; so has the auto industry. Yet on several other fronts, including commercial construction and high-end consumer spending, economic activity appears to be sizzling.

Lombard Street Research, a British economic forecasting firm, recently dubbed the American economy the “anti-Goldilocks economy.”

That is making it challenging for both economists and the Federal Reserve to decide which risk is greater: that housing will drag down the rest of the economy, pushing the Fed to cut rates, or that inflation will remain above the Fed’s comfort zone, forcing it to push up rates instead.

But others say that next year hot and cold could end up canceling each other out, turning the economy balmy.

For now, though, with home construction entering its second year of a downturn, many economists have aggressively pared back their forecasts for growth in 2007. Some have started to utter the R-word.

“We’ve increased the probability of a recession in our forecast to 35 percent,” said David W. Berson, chief economist of Fannie Mae.

On the other hand, Charles Dumas, who follows the American economy for Lombard from London, ticked off a list of countervailing forces from high employment and income growth to robust business investment.

“None of that speaks of a slowdown,” he said. “There has to be a landing but I don’t see any signs of it yet.”

The economy looks very different depending on whether you are inside or outside the housing market.

Consider Andrew Palau, who runs Premier Homes and Additions of River Edge, N.J. Business has dried up as the collapse of the housing market has slashed demand for new master bathrooms and refurbished kitchens across Bergen County in the northeast corner of the state.

“Homeowners don’t have a clear view in front of them so they are not investing because they want to hold on to the money,” Mr. Palau said.

He managed to hold on to his staff of 10 this year, but thinks he is probably going to have to let people go next year. “Everything is telling me that next year will be worse,” he said. “I don’t see how I can keep everyone.”

Virtually every homebuilder in the nation shares Mr. Palau’s concern. Yet a look just outside the border of the housing-linked economy provides a starkly different view.

“Our market is as close to capacity as you can get,” said Michael D. Bolen, chairman and chief executive of McCarthy Building Companies in St. Louis, a commercial builder of everything from schools and hospitals to casinos and parking lots.

To hear Mr. Bolen speak, the job market has the go-go feel of the Internet-driven boom of the late 1990s. “It’s as goofy as it’s ever been,” he said. “We’re offering signing bonuses and guaranteed locations to people coming straight out of school.”

Mr. Bolen said that McCarthy expected to increase its 1800-strong hourly work force by 10 to 15 percent when the construction season picked up in the spring.

This off-kilter performance has allowed for an unusually wide difference of views on the economic outlook next year.

Ian Shepherdson, chief economist at High Frequency Economics in Valhalla, N.Y., expects the economy to virtually stall at somewhere between flat to 1 percent growth in 2007. He thinks the Fed will slash its benchmark short-term interest rate from 5.25 percent today to 3.75 percent by the end of next year.

A majority of traders now anticipate that the Fed will cut rates next year, starting in the summer, though not by quite so much. According to the market for interest rates futures, the Fed is expected to cut its benchmark rate to 4.75 percent by the end of 2007.

Yet for all the economists taking the cue from Mr. Palau’s bleak outlook, others look to McCarthy’s booming business.

Bruce Kasman, chief economist at J. P. Morgan, forecasts the economy will grow at a healthy 3 percent clip in 2007. Rather than cutting interest rates, the Fed may well have to raise them again to quell inflationary pressures. “The rates market is pricing in weak growth and Fed easing,” Mr. Kasman said. “If our view is right there will be a correction.”

Economists were taken by surprise by the speed at which the housing market morphed from a surging bubble to a sinking stone. Today, there are some signs that the worst has passed: mortgage applications seem to be bottoming out, for instance.

But the number of permits issued to build new houses fell for the 10th straight month in November, and they are down about a third since November of last year. Residential investment plummeted in the second and third quarters of the year.

Employment in construction has fallen; so has the production of construction materials and other items related to housing. In the third quarter, the slowdown in homebuilding subtracted more than one percentage point from economic growth.

But for all the damage done by the deflating housing balloon, it has so far been narrowly circumscribed.

Today, virtually every economist agrees that the housing recession is likely to continue weighing on economic growth. But the consensus breaks up over how bad that damage will be.

The most important disagreement is over how intensely the housing recession will ricochet through the rest of the economy and how it will affect consumer spending, which accounts for more than 70 percent of the nation’s economic activity.

“I find it very hard to believe that what started in housing ends in housing,” said Jan Hatzius, chief United States economist at Goldman Sachs. “That you are not going to get any spillovers from a major recession in a sector that accounts for 6 percent of the economy.”

Many economists argue that the decline in housing prices experienced so far must inevitably deliver a big blow to consumer spending. Bluntly put, Americans who spent more than they earned as the price of homes soared cannot possibly go on spending as avidly now that the value of homes is tumbling. And if consumers spend less, businesses will stop investing.

Homeowners are certainly extracting less money from their homes to spend. Mortgage equity withdrawals, net of commissions and taxes, fell in the third quarter for the fourth time in a row, to about $380 billion at an annual rate, the lowest level in almost three years.

They are likely to keep falling. According to the Fed, the equity Americans hold in their homes grew only 0.1 percent in the third quarter, before seasonal adjustments. This was the slowest pace of growth in more than 10 years.

But for all this, consumers have not yet shown any sign that they are ready to put the wallet away. Overall consumer spending grew by 0.5 percent in both October and November, after accounting for inflation, bolstered by the decline in the price of gas.

Shawn DuBravac, staff economist at the Consumer Electronics Association, said he expected sales of everything from big screen televisions to digital cameras to grow by a little less than 7 percent next year, down from about 11 percent in 2006.

While profit margins among some electronics retailers are down due to intense competition, the business is holding up much better than expected. “Lots of people said the housing market would kill the economy,” Mr. DuBravac said. “That hasn’t happened. The consumer seems really healthy going into 2007.”

From hospitals to hotels, spending on services is growing. “This year has been a better year than last year,” said Anne Trevett, the innkeeper at Blackbeard’s Lodge in Ocracoke, a coastal island of North Carolina. “The only down times we have are due to bad weather.”

Even as the housing downturn has curtailed the ability of Americans to borrow, spending is being supported by jobs and wage growth. Employers are adding about 150,000 jobs each month, according to the government’s survey of businesses. As oil prices have declined, real wages have rebounded. Real disposable personal income has grown by 0.5 percent a month, on average, over the last three months.

Businesses are investing heavily, too. Nonresidential investment grew 10 percent in the third quarter, almost compensating for the 19 percent decline in nonresidential investment. “Outside of the housing and motor vehicle sectors,” said the Fed chairman, Ben S. Bernanke, in a speech late last month, “economic activity has, on balance, been expanding at a solid pace.”

There is one crucial weakness to all the forecasts, however. Part way through the bust of perhaps the strongest housing boom on record, the American economy is in uncharted territory.

Nobody has ever seen how a situation like this unwinds.

Allen Sinai, president and chief global economist at Decision Economics, observed that past housing-induced recessions were characterized by rising interest rates and tight credit, conditions that do not apply in these days of still cheap, easy money.

Some economists have drawn parallels to 2000 — when the Federal Reserve spun on a dime and started slashing interest rates only weeks after warning about inflationary risks. But the slump in 2000 came about because highly leveraged businesses, shocked by the end of the tech boom and the drying up of new orders, essentially stopped hiring and investing. Today, corporate balance sheets are in very good shape.

Still, there are enough uncertainties to warrant talk of a recession.

Mr. Sinai estimated that, over time, consumers ended up spending 40 cents out of every dollar in equity they extracted from their homes as house prices went up. They spent 28 percent of the capital gains they made when they sold their homes, and 3 percent of their increase in overall wealth.

“If housing is as unhelpful on the way down as it was helpful on the way up, we will get a recession,” Mr. Sinai said.

But at McCarthy, Mr. Bolen has other worries. “Our suppliers and vendors and subcontractors have been working so hard for so long they are going to get tired,” he said.

Antitrust Ambiguity to Be on Justices’ Docket (NYTimes, 12/8/06)

December 8, 2006
Antitrust Ambiguity to Be on Justices’ Docket
By LINDA GREENHOUSE
WASHINGTON, Dec. 7 — The Supreme Court added two important antitrust cases on Thursday to its calendar for the current term. Both cases, granted at the request of defendants in private antitrust suits, are likely to lead to clarification of areas of antitrust law that have increasingly become unsettled.
One case has been closely watched on Wall Street. It is a class-action lawsuit against more than a dozen leading investment banks and institutional investors that took part in syndicates to underwrite the initial public offerings of hundreds of technology companies in the 1990s.
The suit, brought by purchasers of the stocks, charges that the sharing of information among the underwriters and the way in which they allocated shares to their customers amounted to an antitrust conspiracy.
The Federal District Court in Manhattan dismissed the lawsuit in 2003, finding that the defendants were entitled to antitrust immunity because much of the conduct they were said to have engaged in was explicitly permitted by the Securities and Exchange Commission.
The United States Court of Appeals for the Second Circuit, however, reinstated the suit last year, ruling that Congress had granted no such immunity.
The issue for the Supreme Court in this case, Credit Suisse First Boston v. Billing, No. 05-1157, is how to treat the inherently collaborative activity of an underwriting syndicate, activity that — while it would appear to violate the Sherman Antitrust Act — is permitted by the regulatory agency that oversees it.
While the eventual outcome of the case is uncertain, there is little uncertainty about the second antitrust case the court accepted. The question in that case, Leegin Creative Leather Products v. PSKS, No. 06-480, is how antitrust law should treat the minimum prices that manufacturers require retailers to charge for their products.
In a 1911 case known as the Dr. Miles precedent, this practice of “resale price maintenance” was deemed always illegal under the Sherman Act. The case asks the justices to re-evaluate the precedent in light of modern economic theory, and instead to make these arrangements subject to case-by-case analysis under what is known as the rule of reason.
In other areas of antitrust law, the court has steadily backed away from a categorical view of antitrust liability and is highly likely to use this case as a vehicle for doing the same for resale price maintenance.
Leegin, a privately owned company, manufactures the Brighton line of women’s leather goods and does business only with retailers, mostly small specialty stores, who agree to abide by the suggested retail prices for the products. In 2002, after learning that Kay’s Kloset, a store in Lewisville, Tex., was discounting Brighton products, Leegin suspended shipments.
The store brought an antitrust suit and won more than $1 million in damages, which are tripled under antitrust law. The United States Court of Appeals for the Fifth Circuit, in New Orleans, upheld the judgment. In August, the justices granted a stay to enable Leegin to file a Supreme Court appeal. Such a stay is a fairly unusual action that sends a strong signal that the justices believe that a case is worthy of their attention and that the lower court’s decision was probably wrong.
Leegin’s appeal argues that “the per se rule against resale price maintenance squarely conflicts with this court’s modern antitrust jurisprudence” and has “no foundation in economic theory.” It argues that minimum prices can enhance competition and help consumers by providing incentives to retailers to compete in such nonprice areas as customer service.
If the court accepts Leegin’s argument, a decision about whether any particular minimum price arrangement actually confers a consumer benefit would be subject to case-by-case appraisal under the rule-of-reason analysis that the court already applies to the setting of price ceilings and nonprice retail conditions. Formerly, the court applied a rule of categorical invalidity to those practices as well.
In the securities underwriting case, the court will be scrutinizing a variety of practices that amount to standard conduct on Wall Street: forming a syndicate, ascertaining potential customer interest to determine the size and price of the offering, and then sharing information and markets among competitors. The plaintiffs contend that the underwriters inflated prices by improperly dividing the market and imposing unlawful conditions on their customers.
When the appeal reached the Supreme Court last spring, the justices asked the solicitor general’s office to advise them of the federal government’s view. That request presented a problem because there was no unified government view. Conduct that the Justice Department’s antitrust division regarded as barred under the Sherman Act was seen by the S.E.C. as legal.
A carefully worded brief by the solicitor general, filed last month, urged the court to take the case and find a way to reconcile “two federal statutes critical to the efficient functioning of our economy.”
The brief said the court of appeals failed “to make sufficient accommodation for the securities laws’ policy of encouraging certain types of collaborative activity.”
It added, however, that the district court was also wrong to consider all conduct connected with initial public offerings to be immune from antitrust liability. The brief said the complaint in this lawsuit needed to be examined carefully to make sure that it was based on something more than “conclusory or ambiguous allegations.”
Briefs urging the justices to hear to hear the case were also filed by the New York Stock Exchange, NASD and other industry groups.

Long a Laggard, Wages Start to Outpace Prices (NYTimes, 12/8/06)

December 8, 2006
Long a Laggard, Wages Start to Outpace Prices
By JEREMY W. PETERS and DAVID LEONHARDT
After four years in which pay failed to keep pace with price increases, wages for most American workers have begun rising significantly faster than inflation.
With energy prices now sharply lower than a few months ago and the improving job market forcing employers to offer higher raises, the buying power of American workers is now rising at the fastest rate since the economic boom of the late 1990s.
The average hourly wage for workers below management level — everyone from school bus drivers to stockbrokers — rose 2.8 percent from October 2005 to October of this year, after being adjusted for inflation, according to the Bureau of Labor Statistics. Only a year ago, it was falling by 1.5 percent.
In recent years, many Americans grew anxious about the future and economists questioned whether the recovery from the 2001 recession would ever produce genuine gains for ordinary workers.
The fall in unemployment to 4.4 percent and the recent surge in wages, however, raise the prospect that the job market could be on the brink of another strong run, much like the one that lifted incomes in the late 1990s.
“The labor market is pretty tight right now, so it’s not a huge surprise that we’ve started to see big wage gains,” said Nariman Behravesh, chief economist for the research firm Global Insight. “I think the big surprise is that it took so long.”
Still, there are a number of economic forces at work that raise doubts about whether the recent gains are the start of another boom. It is also possible, economists say, the improvement may turn out to be little more than a temporary spike.
For now, though, with the number of unemployed Americans actively seeking work at a five-year low, help-wanted signs are proliferating again and many businesses are having a harder time finding employees.
That means even lower-wage workers like Mercedes Herrera, an immigrant from Mexico who cleans at San Felipe Plaza, a high-rise office building in Houston, are enjoying more leverage with their employers. Last month, Ms. Herrera’s union, the Service Employees International Union, settled a monthlong strike and secured raises of more than $2 an hour over the next two years for some 5,300 janitors in Houston.
The pay of Ms. Herrera, a 37-year-old mother of four, will increase to $6.25 an hour on Jan. 1, from $5.65 now. “It’s going to be a big difference in my personal finances,” she said, speaking through a translator. With the extra money, she said, she hoped she would no longer have to ask for food from churches.
“We’ve always had to save for things that we have to buy,” she said. “We’ve had to create our own miracles in order to sustain ourselves.”
After years of stagnant, even declining real wages for the typical worker, the recent jump has also delivered a rare bit of good news for a White House coping with an unpopular war and the aftermath of the Democratic victory in the midterm elections.
The pay increases are “huge, even relative to a period that we think of as quite good,” said Edward P. Lazear, chairman of President Bush’s Council of Economic Advisers. “The question obviously will be, How long will it be sustained?”
That question will begin to be answered today when the Labor Department releases its monthly employment report. Forecasters expect the pay gains — which began in earnest in September, when gas prices sank — to extend into November.
But the economy has slowed significantly in recent months, and some analysts predict the housing slump will cause a further slowdown next year that will be a drag on incomes.
“The biggest issue is which direction the macroeconomy is headed,” said Jason Furman, an economist at New York University who served as an adviser to President Bill Clinton. “And there is probably a bit more uncertainty than usual about that.”
If wages rise for only a few months, the current expansion, on the verge of entering its sixth year of growth, would still stand out as an unusually bad one for workers — indeed, the only one since World War II without a sustained pay increase.
In the third quarter, which included the early weeks of the recent pay increases, the share of the nation’s economic output going to workers’ pay and benefits fell to its lowest level in 40 years, according to the Commerce Department.
Further, the average hourly wage for a worker in a nonmanagerial position, $16.91 an hour in October, was about the same as it was in 2003 when inflation is taken into account.
Some economists and incoming Congressional Democrats argue that economic trends like globalization and computerization have fundamentally altered the job market over the last decade or so. In this view, the solid pay increases of the late 1990s, stretching over multiple years, were caused by the technology bubble more than anything else and are unlikely to be repeated anytime soon.
“It’s a good job market, but it’s not the great job market it was back in the late ’90s,” said Mark Zandi, an economist with Moody’s Economy.com. “It was the tightest job market that, arguably, we’ve ever seen.”
At the height of the 1990s boom, the job market became so hot that Burger King was offering $5,000 bonuses to lure managers away from rival restaurants. The unemployment rate hit a low of 3.8 percent in the spring of 2000. Optimism among workers soared, according to polls.
In the exit polls conducted on Election Day last month, on the other hand, only 30 percent of voters said they expected life to improve for the next generation of Americans.
For now, however, paychecks are growing fatter in nearly every corner of the economy. Average hourly earnings for workers outside management grew faster than inflation in every major sector but manufacturing from October 2005 to October 2006, according to Moody’s Economy.com. For workers in leisure and hospitality, financial services and natural resources, for example, wages grew more than 4 percent, after accounting for inflation.
After years of sharply rising income inequality, the recent rise in wages also appears to be increasing pay for both rich and poor. From July through September, the inflation-adjusted hourly pay of workers near the bottom of the wage scale — those making less than 90 percent of all workers but more than the worst-off 10 percent — rose 0.1 percent.
That compares with 0.4 percent wage growth for those close to the top, those making more than 9 out of 10 other workers, according to an analysis of Labor Department statistics by the Economic Policy Institute. Wage growth for both groups is likely to pick up in the final quarter of the year.
Last year, inflation-adjusted wages of workers at the 10th percentile fell 1.8 percent, compared with a gain of 0.3 percent at the 90th percentile.
The most obvious cause of the recent turnaround is the fall in energy prices. Nominal wages have been accelerating since the beginning of 2004, but inflation, led by soaring gas prices, kept Americans from noticing any real rise in their pay during much of that time. Since the price of a gallon of regular gasoline peaked for the year at $3.03 in early August, prices at the pump have steadily declined. The national average is now down to about $2.29 a gallon.
That has taken a tremendous weight off wages, which finally started to outpace inflation in August. Inflation ran at a rate of 1.3 percent from October 2005 to October of this year, the lowest level since mid-2002. Earlier this year, inflation was running as high as 4.3 percent.
Wages have risen so swiftly that some economists worry that they could push inflation up on their own, by forcing companies to raise prices. Last week, the Federal Reserve chairman, Ben S. Bernanke, warned that the central bank might have to raise interest rates again. “One factor that we are watching carefully is labor costs,” he said.
The implications for higher inflation aside, Mr. Lazear, the White House economist, said he believed — and hoped — the trend would continue. “It’s not unreasonable to think that real wage growth will be sustained for a significant period of time simply because the labor market is so tight,” he said.
Workers — many having cut their savings and taken on more debt as wages failed to keep pace with inflation — would welcome that.
Alanzo Brown, who handles hazardous materials for a chemical company in Houston and recently completed a course that qualifies him for a raise, is expecting his pay to rise $4 an hour soon, to $19. At 29, Mr. Brown hopes to start saving more money so he can move from a rented apartment into his own home.
“I’m really trying to get into this saving thing,” Mr. Brown said.
Thayer Evans contributed reporting from Houston.