Household Income Growth Expectations Register Biggest Drop Ever: NY Fed Survey

A customer shops in a Kroger grocery store in Houston, Texas, on July 15, 2022. (Brandon Bell/Getty Images)

Expectations for U.S. household income growth saw its largest decline in January, even as short-term inflation is expected to remain elevated, the latest data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations shows.

“After increasing each month since September of last year, the median expected growth in household income dropped by 1.3 percentage point to 3.3 percent. This is the largest one-month drop in the nearly 10-year history of the series,” according to a press release on Feb. 13. “January’s decrease was more pronounced among respondents with no more than a high school education, respondents older than 60, and those with annual household incomes below $50,000.”

Despite the drop, the January household income growth expectations still remains above its pre-pandemic level, and is only slightly below its 12-month trailing average of 3.5 percent.

The median household spending growth expectations fell to 5.7 percent in January from 5.9 percent a month back, the third monthly consecutive decline. But despite the fall, household spending growth expectations at 5.7 percent remain higher than income growth expectations of 3.3 percent.

Meanwhile, median inflation expectations for the year-ahead horizon were at 5 percent. Though it is down from the 7 percent inflation seen in 2021 and 6.5 percent inflation in 2022, a 5 percent inflation is still far from the Federal Reserve’s inflation target of 2 percent and will likely put pressure on household finances.

Impact of Inflation on Wages

The past two years have seen positive wage growth. However, elevated inflation rates mean that the wage growth’s impact was nullified and people ended up losing purchasing power.

The average hourly earnings rose by 4.9 percent in December 2021 over the past year, according to data from the Bureau of Labor Statistics (BLS). But inflation-adjusted average hourly earnings, or real earnings, fell by 2.1 percent for the year.

Similarly, average hourly earnings grew by 4.6 percent in December 2022. After accounting for inflation, the real average hourly earnings declined by 1.7 percent.

According to JP Morgan, no sector in the American economy has registered a wage growth covering inflation over the past year. Only two sectors, information and financial services, showed a more than 2 percent wage growth in annually adjusted January figures.

Sectors such as manufacturing, retail, construction, leisure, hospitality, health services, and education showed a negative nominal annualized change of negative 2 percent to negative 6 percent.

2023 Wage Increase, Burning Through Savings

Pay budgets at U.S. firms rose by 4.2 percent in 2022, said workplace consultant Willis Towers Watson (WTW). This year, the firm expects companies to raise salaries by 4.6 percent, which would be the highest salary hike in around 16 years.

Among firms looking to change their salary increase budgets, around 17 percent plan to fund the increased budget by raising prices, while 12 percent will reduce staff numbers and resort to company restructures.

Even with such a high salary increase, Americans can still end up losing purchasing power if inflation remains elevated. The New York Fed’s survey had shown that people were expecting year-ahead inflation to be at 5 percent, which is above WTW’s expected 4.6 percent salary hike for 2023.

As Americans struggle with wages that are unable to keep up with inflation, they end up burning through their savings in a bid to maintain living standards.

The personal savings rate in January 2020 before the COVID-19 pandemic was 9.1 percent based on data from the Federal Reserve Bank of St. Louis. By December 2022, this had fallen to 3.4 percent. The last time the personal savings rate was lower than 3.4 percent was in April 2008.