Spending vs. Income

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).

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.