As we start the New Year, we should train our eyes on the consumer, paying attention to whether there's just the traditional post-holiday falloff in spending — or something more dramatic. The latter would be cause for concern.
Wages, taxes and inflation are the three primary factors determining how much people have to spend.
Of course, how much money they save also plays a role in how much they have left to buy goods and services. But since the whole concept of savings has become far more complex, it's nearly impossible to cover it adequately in the context of this article. Retirement plans, health savings plans, benefit packages, near-cash savings instruments and homeowner's equity, for example, are all part of the savings equation. So for now we'll stick to pay, taxes and inflation.
Rate of pay depends upon level of output and per-unit pay. Salaried workers are paid by the week or the month, and hourly employees are aptly identified. The difference is that hourly workers can increase income not only by increasing their base per-hour wage, but also by increasing the number of hours they work. In our industry, drivers are paid by the mile and by the hour — or with a per diem to cover expenses.
In any case, wages are currently growing at a rate of about 3% to 4% a year. We expect that to continue through the first half of 2006, followed by a slight increase during the second half of the year.
Optimism about wage increases during the second half is the result of hiring surveys that point to an economy that will add 200,000 jobs per month, on average, for the next two years. This means the labor pool will decline slightly, as will skill level of the average applicant. Consequently, employers will have to pay more to keep the productive workers they already have onboard, as well as attract the best of the remaining labor pool. It remains to be seen whether this will translate into a demand for labor strong enough to warrant wages increases in the 4% range.
Just around the corner stand local, state and federal governments, all eager to grab their portion of workers' hard-earned money in the form of various taxes. The federal government seems to be spending well in excess of income, so there's pressure to raise taxes.
For the most part, state and local governments have seen revenues exceed expectations during the first half of 2005. Yet a significant number anticipate fiscal problems during 2005 and 2006, primarily due to increases in the cost of healthcare, energy assistance, education, and corrections facilities. Again, increases in property and income taxes will likely provide the additional revenue needed.
If that turns out to be the case, there will be a decrease in the amount of take-home pay available for discretionary spending. Not really rocket science. To the extent that taxing authorities rely on wage gains to exceed tax increases, they'll be able to hide behind the “wages are growing faster than taxes” shield.
The real kick in the head comes from inflation, which is simply an increase in the cost of a particular product to the consumer over time. If the combination of tax increases and rising inflation wipes out any wage increase, people will have less money to spend. It's that simple.
The extent to which that affects freight traffic will depend on which goods and services consumers decide to leave out of their shopping carts.
Economists expect inflation rates to be higher than the last five-year average, and they expect wage increases to be at or below the last five-year average. Make no mistake about it-tax increases will put a damper on how much people can buy.