Forecast: Stronger economy; wage increases

January is when economists peer into their crystal balls and predict the future. Oh, if it were only that easy. Between politics, world events, and fickle household and business attitudes, our economic forecasts are often more guesses than predictions.

That said, here is my outlook, keeping in mind my normal caveat: This is today's forecast, not yesterday's and probably not tomorrow's.

In a nutshell, in 2014, Main Street will finally join Wall Street in reaping the benefits of a stronger economy.

Consumer spending powers the U.S. economy. Roughly 70 percent of total gross national product comes from household purchases of things such as motor vehicles, clothing, housing, food, utilities, and Eagles gear. If consumption is not expanding strongly, it is awfully hard for the economy to grow solidly.

So, what determines consumer demand? Basically, money: The more we have, the more we spend. So the foundation of all forecasts is an understanding of worker compensation. The faster it increases, the greater spending grows and the stronger the economy expands. Really, it is that simple.

Unfortunately, the missing ingredient in this recovery has been growing worker pay. As we all know, wages and salaries, adjusted for inflation, have increased minimally for about six years. Changing limited wage gains into solid income growth, though, is not an easy task.

The dismal compensation growth is not something sinister. It isn't the result of coldhearted business executives taking advantage of their workers so they can make lots of money. Well, not completely. It comes from the most basic tenet of economics: When supply exceeds demand, prices (wages, in this case) are low.

The Great Recession caused the unemployment rate to surge from its low of 4.4 percent in May 2007 to 10 percent in October 2009. That created a large supply of people searching for work. But firms were not hiring. Indeed, in 2009, more than six million jobs were lost.

For an economist, the consequences were predictable: The huge quantity of job seekers allowed firms to pick and choose the workers they needed. They did not have to give their employees pay increases since there was no place for them to go. Employers could even pay new hires lower salaries.

The business of business is business, and in difficult economic environments, which companies faced in the 2008-10 period, it made sense to keep employee pay down. And businesses did that with a vengeance.

As long as the unemployment rate is well above full employment, firms can and will keep a lid on worker compensation. During the last expansion's boom times, the unemployment rate was near and even below full employment, and not surprisingly, pay gains were pretty good. Once the recession hit, the need to pay up disappeared.

But that is changing. With full employment about 5.5 percent, the current unemployment rate is roughly 1.5 percentage points higher. While that may seem like a wide gap, at the worst point in the recession, the difference was 4.5 percentage points.

The slow-but-steady recovery has greatly narrowed the gap between the actual unemployment rate and full employment. As we move through 2014, the difference should shrink further, potentially sharply. It is possible the rate could be near 6 percent unemployment by year's end.

We don't have to reach full employment for wage gains to accelerate. The rate is a national average that varies widely across the country. For example, in November, the unemployment rate was 7 percent in the Philadelphia region, 8.5 percent in Los Angeles, and 4.9 percent in the Washington metropolitan area.

As the nation gets closer to full employment, a growing number of regions will have already reached that point. Local labor shortages will start appearing, causing firms to start bidding for workers. When the excess supply of workers turns into excess demand, employees regain the upper hand. That is what triggers the needed gains in pay.

This is the first year since the Great Recession began in 2007 in which firms may find the number of job applicants shrinking significantly. Until now, we were so far from full employment that even decent declines in the unemployment rate didn't cut greatly into the large pool of unemployed workers. By the end of this year, that pool could turn into a puddle.

The economic-recovery turtle is nearing the finish line. Reasonable job growth and decent reductions in unemployment will generate, finally, the kind of solid income gains that will power stronger spending and create a truly robust economic expansion. This should begin happening this year, and if it does, Main Street may start receiving the spoils it has so far missed.

jnaroff@phillynews.com