Brief Look at Income and Spending in June

Yesterday, the government released its estimate of consumer spending and income for June.  The bad news is that consumer spending has been flat recently, but the good news is that incomes adjusted for inflation are rising somewhat, which should help sustain consumer spending down the road (reversal of earlier this year).  The savings rate rose to 4.4%, reflecting in part revisions to previous data (the government made revisions for the past 3 years based on more up-to-date information).  What do we learn from this?  It's more of the same.  No recession barring another shock, but consumer spending should be able to plod along during the rest of the year.  As mentioned in several previous posts, other factors will impact consumer spending including the fiscal cliff and the global economic slowdown.

In addition to income and spending, the report provides what's considered by most to be the best measures of consumer inflation.  Inflation based on the PCE index is now running at 1.5% over the last year, while core inflation (exlcuding food & energy) is 1.8%.  Inflation has slowed from a moderate pace to almost nonexistent in recent months.  In fact, in the second quarter of 2012, PCE inflation was -0.3% (annualized rate) while core inflation was more stable at a 1.8% annualized rate.  Economists tend to be criticized for discussing core inflation; many consider it a way of ignoring higher inflation.  The recent behavior of inflation is one reason that most economists think that it's a better gauge of short-term inflation trends than overall inflation as overall inflation bounces around due to significant fluctuations in food and energy prices while core inflation better reflects underlying trends.  Given that, inflation seems to be running a little low (less than the Fed's target of 2%), but there are no signs of deflation any time soon.  That will probably make the Fed hesitant to engage in QE3 at this time.

May Income and Spending Report

This morning, the government released the latest report on income and consumer spending.  The data continues to paint a picture of a sluggish economy with low inflation.  The headline numbers are that real (adjusted for inflation) disposable personal income rose by 0.3% in May while real consumption rose by 0.1%.  Consumption has risen by 1.9% over the last year, but only at an annualized rate of 0.4% in the last 3 months, confirming a slowdown in consumer spending, which will be reflected in the report on economic growth for the second quarter (to be released in late July).  Given that spending rose by less than income in May, the savings rate rose slightly to 3.9%, erasing some of the decline for this year, but still below the rate in January (and all of last year).

On a positive note, consumer inflation was slightly negative in May, led by a decline in energy prices.  Over the last year, inflation has been 1.5% while core inflation (excluding food and energy) was 1.8%.  Many criticize economists for considering core inflation in the short run, thinking that it's a way to downplay inflation.  However, currently inflation is running below core.  Why?  Though food inflation has been 2.3% since May 2011, energy prices have fallen by 3.8% (remember that the price of a gallon of gas was almost $4 a gallon in Spring 2011).  Of course the good news in terms of low inflation is related to the bad news involving sluggish consumer spending; a weak consumer tends to put a lid on price increases.

Latest reports on GDP, Income, and Spending

The BEA released revised figures for fourth quarter economic growth, indicating that the economy grew at a 3% annualized rate, a little faster than first thought.  There were minor changes: a slightly smaller increase in inventories and a slightly larger increase in spending, but it still means that most of the growth was due to a build up in inventories, with final sales increasing at just over a 1% rate.  On a more positive note, GDI (gross domestic income) was revised up, resulting in a higher savings rate, suggesting that consumers may be in slightly better shape than previously estimated.
This morning, information on income and spending was released, showing a slight decline in disposable income adjusted for inflation and no growth in inflation-adjusted consumption.  That means consumption has been flat for 3 straight months.  Given that disposable income is just barely keeping pace with inflation, consumption has been and is expected to continue to remain constrained.  Meanwhile, inflation as measured by the PCE index declined to 2.4% over the last year, after approaching 3% last summer.  Excluding food and energy, inflation was about 2% over the last 12 months.

Add it up and it continues to tell the same story: a sluggish recovery as consumer spending is held back by sluggish growth in income and continued deleveraging.

Report on Income and Spending

This morning's income report confirms what was released in the GDP report yesterday.  Disposable income adjusted for inflation (real disposable income) declined for the third straight month (July, August, September) while spending increased, resulting in a decline in the savings rate to 3.6%, the lowest since right before the recession (fourth quarter of 2007).  Total real disposable income is still about $150 billion below its peak in Spring 2008.  Unless incomes start growing more quickly, it's going to be hard for consumers to significantly increase their spending, thus limiting how quickly the economy can grow in 2012.