What explains the divergence between US consumer spending and job growth?

The apparent wedge between US consumer spending — seemingly in the midst of a mini reacceleration — and the softening trend in US headline job growth has been a subject of increasing discussion on Wall Street and across financial media ever since we highlighted its importance 10 days ago.

So far, I personally don’t love all the answers proffered on this topic, so I will engage with the wedge.

The easiest explanation is that the framing here could be much more precise. Call it pedantic (it’s not), but spending doesn’t come from jobs, but rather the income that comes from jobs.

What I call the US’s “private sector national paycheck” (the index of aggregate weekly payrolls) is up 2.8% year to date through August. Personal consumption expenditures are up 1.9% through July, year to date. 

Zooming out a little, both of these metrics are up in the mid- to high 4% range year on year. So this may simply be a case where the slowing of headline job growth significantly overstates the slowing of labor income growth.

(However, I’d be remiss not to note that public sector jobs are poised to take a big hit in the October nonfarm payrolls report — released in early November — in light of buyout and severance deals reached earlier this year.)

And a reminder that higher earners disproportionately drive US spending, and most of the areas where we’re seeing labor market softness are associated with lower-income and traditionally marginalized cohorts.

Beyond this, the importance of labor income to total income has been roughly flat since the end of 2023. One thing that’s gone up is the share of income that is tied to government transfer payments, which is what you’d expect given the aging population.

On the margin, more consumption is being de-linked from labor over time.

And, of course, there’s the stock market. 

I continue to believe the particular character of the market recovery off its April lows — a rebound in which retail investors who bought the dip were outsized beneficiaries — means that the so-called wealth effect, or how much a boost in asset prices might be expected to boost consumption, may be unusually potent.

Beyond that, some tactics used by retail traders (I’d point in particular to call overwriting) are income-generating in nature. If an individual investor executes this strategy on their own, rather than through a call-overwriting ETF, they are receiving premiums in exchange for capping their potential short-term upside on a stock (and risk having their position called away).

Are those premiums being treated as extra dry powder for one’s investment portfolio, or additional available income to spend? Even if the answer is “both,” well, that’s providing some lift for consumption.