BUMP AT THE PUMP

The Saudi stimulus will supercharge American consumers

You don’t have to live on Harvard Street to realize falling gas prices are a good thing.
You don’t have to live on Harvard Street to realize falling gas prices are a good thing.
Image: Reuters/Brian Snyder
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America’s stellar December jobs report came with a serious problem: persistent weakness in American wages. Wages of production workers rose a scant 1.6% in December 2014, compared to the prior year, quite low from a historical perspective. Still, the situation isn’t quite as bad as it looks. Why? Oil.

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Though oil field workers might beg to differ, the global collapse of crude prices is a windfall for the US economy, keeping overall inflation in check and propping up real (or inflation-adjusted) wage growth. Inflation-adjusted wages measure the purchasing power of employee paychecks. Here’s a look at year-over-year changes in real wages over the last few years. (You’ll notice what looks like a surge during the worst of the recession, as prices collapsed and the US showed signs of slipping into deflation.)

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In short, as prices fall, real wages rise. In November, the US consumer price index fell 0.3% compared to the prior month, the largest decline since December 2008. Year-over-year prices are still up. But, as you can see in the chart below, consumer energy prices have collapsed.

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This mini-stimulus—perhaps we could call it the  Saudi stimulus—of lower energy prices has important economic implications. In a research note earlier this week, Goldman Sachs economic analysts said they expect real income growth to amount to roughly 5% later this year, crediting both lower inflation and a sturdier job market. “The most obvious reason to expect continued strength is the pickup in real income,” they wrote of the US economy.