One of the reasons that many economists remain cautious about the ongoing strength of the recovery is the state of the consumer. Two factors are expected to constrain consumer spending - deleveraging and modest gains in income. On Friday, the government released the latest report on disposable income and consumer spending. The headline numbers show that though disposable income rose by 0.2% in February, consumer spending rose by 0.8%, reducing the savings rate to 3.7%, the lowest since August 2009. After adjusting for inflation, real disposable income actually declined slightly while spending rose by 0.5% (real disposable income has declined in 3 out of the last 4 months). For all of 2011, real disposable income rose by 1.3% while spending rose by 2.2%. The blog, Calculated Risk, has a brief discussion of the role of transfer payments in affecting personal income (note: transfer payments include government payments such as social security, welfare, etc.). Real disposable income excluding transfer payments are still down 4.2% since the start of the recession.
It's hard to imagine consumer spending increasing at a high and sustained pace unless there's more significant gains in income. The hope is that recent gains in employment will translate into income gains, but it's not showing up yet. Thus, it's likely that growth in consumer spending is likely to be more subdued as 2012 progresses, thus limiting the pace of economic growth (note: it still signals continued economic growth).