What the U.S. economy really needs to recover

A recent uptick in employee earnings has some experts saying the economic recovery, during which income gains have gone almost entirely to affluent Americans, is beginning to trickle down. Such a rise is critical not only to lifting economic growth in the short term, but sustaining the robust consumer spending that the U.S. economy needs to thrive.

No need to rush out and buy an umbrella just yet. The Commerce Department reported that average income rose 0.3 percent in January after being flat the prior month. Government economists also said that if it hadn't been for the expiration of jobless benefits for more than 1 million unemployed people at the end of December, the jump would have been even greater.

Paul Dales, senior U.S. economist at Capital Economics, among others, sees even better news. "The annual growth rate of average hourly earnings for all employees rose to 2.2 percent in February, from 2 percent in January," he wrote in a research note. "And wage growth of non-supervisory workers rose to a three-year high of 2.5 percent, from 2.3 percent. What's more, the three-month annualized growth rates, which isolate the latest trends, have risen to 2.7 percent and 4.0 percent respectively."

As he pointed out, the last time average hourly earnings for non-supervisory workers increased this quickly was just before Lehman Brothers failed in September 2008.

Yet even if these best-case scenarios are true, the numbers are less encouraging once you factor in inflation, currently running at 1.6 percent. That means the real three-month annualized growth rate in hourly earnings for average workers isn't 2.7 percent, but 1.1 percent.

As Ian Shepherdson of Pantheon Macroeconomics writes in a client note, "To reach the 3 percent or so everyone wants to see requires some combination of better payroll growth, bigger wage gains or a further dip in inflation. We think disinflation is now over, which means the answer to weak real incomes has to come from the labor market."

According to Shepherdson, improving income significantly would require sustained job growth of at least 250,000 jobs a month. So far, on its best months the economy has been adding around 200,000 jobs a month, while sinking to much lower levels in December and January as wintry weather chilled hiring.

What the recovery really needs isn't for stocks to reach another all-time high, but for a real recovery in what most people earn.

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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