A year ago, I wrote that 2015 would be “the true test of the economic recovery.” The previous year had been a good one in terms of job growth and other traditional economic measures, but anemic wage growth meant that many Americans hadn’t experienced much of a recovery. The economy, I argued, couldn’t be truly good until that changed.
A year later, it’s tempting just to run the same story again with a new date. The overall economy continued to make steady progress in 2015 — the unemployment rate, at 5 percent, is the lowest it’s been in more than seven years — but wages still haven’t experienced the same gains. The new year, then, begins with the same fundamental question that I posed a year ago: Will 2016 be the year that the economic recovery at last translates into concrete gains for everyday Americans?
There is some reason to think it will be. Falling unemployment means that fewer people are looking for jobs, which should force employers to offer higher wages to attract and retain talent. That’s been true for a while, of course, but in recent months there has been an important shift: The unemployment rate is at or near what most economists consider “full employment,” the point at which nearly everyone who wants a job either has one or can find one quickly.1 If economists are right, wage growth should soon start to accelerate.
There is evidence that’s already starting to happen. Average hourly earnings, the most widely followed measure of wage growth, were up just 2.3 percent in November from the previous year, before adjusting for inflation, significantly less than economists would expect given the low level of unemployment. But alternative measures of earnings show faster growth. Total personal income — all the money made by everyone in the country, added up — is on track to post its best year of growth since the recession ended. And median household income has finally returned to its prerecession level, according to a recent analysis from Sentier Research. If the economy continues on its recent path in 2016, those trends should continue or even accelerate. 2
But it’s far from certain that the economy will continue on the same path in the new year. U.S. factories are slowing output and shedding jobs as a weak global economy cuts into demand for American products overseas. Low energy prices are leading to job cuts in the oil and gas sector and are pushing a growing number of oil companies into bankruptcy. That leaves the recovery dependent on consumers, who became more confident at the end of the year but whose actual spending is growing more slowly. (Of course, if wages pick up, that could also lead to more spending.)
And then there is the great unknown: how the economy will respond to the Federal Reserve’s decision last month to raise interest rates for the first time in nearly a decade. So far, financial markets have taken the increase in stride. But some experts worry that higher rates could burst the tech bubble in Silicon Valley, crater the corporate bond market or hurt small-business owners. Prominent economists including former Treasury Secretary Larry Summers have argued the economy isn’t yet strong enough to withstand higher interest rates.
Few economists expect a major slowdown in 2016, let alone a recession. And while such forecasts have a checkered history, there’s little reason to think the conventional wisdom is wrong this time around. The question, though, is whether 2016 ends up being yet another year of tepid and unequally distributed growth, or if it can instead mark a true turning point.