Americans face higher prices, flat wages in 2013

Americans face higher prices, flat wages in 2013

The new norm will be the same as the old norm for most American households this year: financial suffering and a continued slow recovery from the Great Recession.

Americans can expect price tags for many goods and services to increase faster than take-home pay again this year. Higher costs are expected for food, airline flights, rent, housing prices, government fees, shipping costs and college tuition. While gasoline prices are expected to fall by a small amount, they’ll do so after two consecutive years of record prices at the pump.

Many households will be confronted by the additional 2 percent payroll tax included in Tuesday’s political deal to avert the fiscal cliff. The tax increase is expected to cost the average Iowa worker about $800, according to Creighton University economist Ernie Goss.

When it comes time for raises, workers will continue to compete with the higher prices their employers expect to pay for health insurance, which rose 7 percent in Iowa last year, according to David P. Lind Benchmark, an employee benefits research firm in Clive.

“We can’t afford for anything else to go up, but I can’t think of anything that’s not going up — from water to car insurance,” said Cheyenne Paullin, 27, of east Des Moines. “The price of gasoline is really insane. Instead of costing us $25 a week to fill up each of our two cars, it’s costing us $40, and that takes away money that we would otherwise spend on household items like groceries.”

Gasoline prices averaged a record $3.63 a gallon nationwide in 2012.

Paullin said her family budget is being stretched to the breaking point. The mother of three children, ages 1 to 5, said her monthly municipal water bill rose from $50 to $70 last year.

Meanwhile, husband Jason, the family’s sole breadwinner, has seen his hours cut from more than 40 a week to 28 to 30 at the Titan Tire plant in Des Moines.

It’s not all bad news. Several experts predict the economy will shift into higher gear in the second half of this year due to improving home and auto sales and rising home prices. Climbing home prices are a positive for economic growth and consumer spending because they create wealth for homeowners.

“It’s going to take a while for the U.S. economy to recover, but we’re gaining momentum,” said Anthony Chan, chief economist at JPMorgan Chase & Co.’s private wealth management unit. “We’re starting to see the stars align in a way that is consistent with improvement in consumer markets. Main Street America really benefits from higher home prices, because they have a bigger chunk of their household balance sheets in housing.”

Unemployment, low wages persist

More than a quarter of the nearly 190 million non-disabled Americans, ages 16 to 64, did not have a job in November, according to the Bureau of Labor Statistics.

Once the data are adjusted for active members of the military and people in prison, the number of healthy, working-age Americans without an above-the-table paycheck surpasses 54 million. That’s almost as many people as the combined populations of Iraq and Afghanistan.

“There’s a great deal of economic shock in the U.S. because so many people are unemployed,” said Bob Baur, chief global economist at Principal Global Investors in Des Moines.

The percentage of likely workers without a job — about 29 percent — is nearly the same as in the final year of the recession, which ended in June 2009. That rate differs from the mainstream national unemployment rate, which was 7.7 percent in November, because it includes people who are not considered part of the civilian labor force because they’re not looking for work.

The recession eliminated about 8.2 million nonfarm jobs during the 18 months that ended in June 2009. About 90,000 jobs must be added to nonfarm payrolls each month just to keep pace with population growth, Chan said. Once that figure is calculated, the total shortfall balloons to 9.84 million jobs.

The shortfall in Iowa is 89,000 jobs, according to the Iowa Policy Project, a nonprofit research group based in Iowa City.

The Bureau of Labor Statistics announced Friday that the U.S. economy added 155,000 jobs in November, which translates into a net gain of 65,000 jobs using Chan’s modifier.

“I look for U.S. nonfarm payrolls to increase about 125,000 jobs a month on average in 2013,” he said. “In terms of bringing the national unemployment down to 5 percent to 5.5 percent, we’re talking about 2018 or later.”

Iowa’s labor market is in better shape, with a jobless rate that fell to 4.9 percent of the state’s civilian labor force in November from 5.1 percent in October. However, the national glut of people looking for work means that employers don’t have to be as generous to secure new talent.

“Wages are the real lagger,” said John Silvia, chief economist at Wells Fargo. He’s forecasting a 1.9 percent to 2.1 percent increase in wages this year and a 2.1 percent to 2.4 percent increase in the consumer price index. The CPI is widely viewed by economists as an inflation gauge. It rose 3 percent in 2011 and was up 1.8 percent during the 12 months ended in November.

Social Security benefits are scheduled to rise 1.7 percent in 2013.

“More things are going up than down, and salaries are not keeping pace,” said Ryan Burlage, a 31-year-old business analyst from Lost Nation. “I used to get $60 to $70 an hour for a project. Now it’s $50 to $60.”

Burlage said the cost of taking a date out to see a movie and have dinner and drinks has also gone up, from $60 or $70 to $100 to $120. He’s seeing higher prices for everything from bacon to road salt to movie tickets and food.

Emphasis placed on housing market

The U.S. economy is still the largest in the world, but it changes direction with the nimbleness of a mammoth cruise ship.

Economists expect the recovery from the financial crisis that began in 2007 to continue until at least 2015 and possibly 2019. They’re watching the housing and labor markets closely for signs of momentum.

Key interest rates remain near historic lows, but economists expect them to rise as the housing market and economy recover.

Higher home prices support increased consumer spending, which accounts for 70 percent of the U.S. economy, as new homeowners purchase everything from lawn mowers to barbecue grills.

Construction of new homes creates jobs. And higher home values make it easier for homeowners to take advantage of today’s historically low interest rates to refinance their mortgages or to sell a home when they need to relocate for a new job.

“The housing market is gaining critical mass,” Silvia said.

New home sales rebounded to 338,000 units in the first 11 months of 2012, from a record low of 282,000 during the same period of 2011, according to the U.S. Commerce Department. The average sales price in November was $299,700, up 17 percent from a year ago.

Iowa home sales of all types increased 12.5 percent to 32,414 units in the first 11 months of 2012 from the same period of the preceding year, according to the Iowa Association of Realtors. The average sales price in November was up 8 percent on a year-over-year basis to $137,256.

Yet many American families can’t qualify for low mortgage rates because of the damage done to household balance sheets. The Great Recession wiped out 20 years of net worth accumulation for poor and median income households in just 18 months, University of Chicago finance professor Amir Sufi said.

More signs of hope ahead, experts say

For businesses, getting past the uncertainties of the presidential election and the so-called fiscal cliff is a big step toward encouraging investment, economists say. U.S. businesses are sitting on $2 trillion of liquid assets, which is tinder for future economic growth, according to Jim Chessen, chief economist of the American Bankers Association.

“That’s a lot of money sitting on the sidelines,” he said.

Principal’s Baur says the worst is over.

“We think the reasons that spurred the ‘new normal’ idea are coming to an end,” Baur said. “The underlying fundamentals of the U.S. economy are probably better than people realize.”
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