Better News On Consumer Spending, But ...
By Scott J. Brown
April 2, 2012
The monthly report on personal income and spending rarely gets much interest from the financial markets. However, the spending figures are a direct part of the government’s GDP calculation. The latest numbers (through February) paint a much brighter picture than they did a month ago.
A month ago, the January personal income and spending report showed inflation-adjusted consumer spending flat-lining in November, December, and January. The monthly arithmetic suggested that spending was tracking at a 1.0% to 1.5% annual rate in 1Q12, a lot lower than was projected earlier. However, the latest report showed a 0.5% gain in February and upward revisions to December and January. The first quarter pace now appears to be in the 2.0% to 2.5% range – not especially strong, but much better than it appeared a month ago.
Consumer spending growth is always a bit uneven from month to month. The key question is whether the recent strength will last. The financial markets often put a lot of weight on consumer attitude measures, but these aren’t key drivers of spending. If you know income, wealth, and the consumer’s access to credit, consumer sentiment adds little predictive ability. The biggest long-term driver of spending is income. Private-sector wages and salaries have improved over the last year, reflecting overall job gains. Government wage income has been about flat, as state and local governments have trimmed their workforces. Social Security payments saw a cost-of-living adjustment in January, the first in three years, but other government transfers, especially unemployment insurance benefit payments, have been trending down. Disposable income has been moving up modestly in recent months, but not much faster than inflation. Real disposable income rose just 0.3% over the 12 months ending in February. That’s in aggregate. Real disposable income per capita fell 0.4% over the 12 months ending in February.
Home values represent a significant amount of wealth for most Americans. During the previous decade, consumer spending was fueled partly by the extraction of home equity. At its peak, home equity withdrawal amounted to about 8% of the size of disposable income. In addition, home sales generated a fair amount of capital gains, not all of which was plowed back into a new mortgage. In contrast, consumers have continued to pay down mortgage debt in recent quarters, home sales have been soft, and weak home prices have continued to restrain household wealth, in turn dampening the pace of spending.
One of the most positive recent developments has been the gradual easing in bank lending to consumers and small businesses. Credit to smaller firms was tightened sharply during the financial crisis in late 2008. Lending is only starting to get back to normal, although the new normal is unlikely to be the same as what we saw during the housing boom. This increase in bank lending is much welcome – it is far from excessive and is unlikely to put much upward pressure on inflation.
Gasoline prices, of course, are a major wildcard. The impact of higher gasoline prices depends on the magnitude and duration of the increase, it typically shows up with a lag, and it falls a lot heavier on those at the lower end of the income scales. Many areas of the country report record ridership in public transportation. Motor vehicle sales have been fueled partly by consumers seeking better gas mileage. Indeed, even BMW boasts 38 miles to the gallon for one of its newer models.
While the spending outlook has improved from a month ago, it’s not enough for most Fed policymakers. It will take much more substantial economic growth to undo fully the recession’s damage to the labor market. Inflation is unlikely to be much of a threat and officials are expected to maintain an exceptionally low level of short-term interest rates for a long time (well into 2014). QE3 is still seen as unlikely, but it’s not off the table completely.
(c) Raymond James