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Personal Income & Spending: Improved, Trends Still Negative

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    June 29, 2013

    On the surface the Personal Income and Spending report from May came in pretty much in line with expectations.  The good news is that both incomes and spending did increase contributing the slate of economic reports that have beaten expectations as of late.  However, it is important to remember that economic data does not trend in only one direction, and after a slate of weakness in reports as late, it is not surprising to see some bounces in the data.

    However, the revisions to the previous data was more concerning.  Personal incomes for April were revised higher by $19 billion while personal consumption expenditures (PCE), which comprises 70% of the GDP calculation, was revised down by $42.7 billion.  In fact, PCE was revised sharply lower in every month going back to January, as shown in the chart below, with the revisions primarily focused in the “services” category.


    The negative revisions in consumer spending for January through March was primarily responsible for the sharp downward revision in this week’s GDP report which was revised down from a 2.4% to 1.8% annual growth rate.  The sharp downward revision to April will weigh on the Q2 GDP report as well.

    In March I questioned the abnormal surge in services related spending that occurred in the February PCE report as it was not consistent with the data trends I had been tracking.  In that report I quoted:

    What was the offset? Why a massive surge in consumption expenditures on services, which rose by $53.8 billion, which absent the spending aberration for September 11, 2001, which was reversed in the following month, was the biggest monthly increase on record! What drove this record services spending spree is anyone’s guess.”

    We now come to find out that that surge in Services related spending was a huge error in assumptions and makes one question the validity of the data currently.  With this in mind the most recent release of personal income and spending data showed that personal spending rose 0.3% in May following a downwardly revised 0.3% drop in April.  Personal Incomes, however, rose by 0.5% in the month, more than double the expected 0.2% monthly increase, up from an adjusted 0.1% increase in April.

    As shown in the chart below the increase in personal incomes centered around a $24 billion increase in compensation, a $31 billion rise in income on assets (dividends and interest income), and $19.2 billion in social benefits. The question in the months ahead will be whether the increase in wages is an anomaly that gets revised away OR if we are beginning to see a thawing of the ongoing wage freeze of the last few years.  The latter would certainly bode well for a stronger economic environment in the future and this certainly deserves monitoring in the months ahead.


    However, despite this increase in income – spending was in line with expectations following the sharp downward revisions discussed above. This leaves one to wonder if we will not see some further downward revisions to the data in the months ahead.  This suggestion is due to the fact that the net increases in personal incomes did not translate in substantially stronger consumption but rather stronger personal savings rates.  Historically, increases in personal savings rates has led to a decline in consumption expenditures.  (Note that PCE has already been in an annualized rate of decline since the peak of economic activity in 2011)


    The problem, of course, is that in an already weak economic environment that is growing at less than 2% annually – increased saving rates drag on economic growth.  If this trend persists it does not support the estimates for 3-4% economic growth by year end.

    Importantly, the declining trends in personal consumption should be cause for some concern.  The chart below shows PCE on an annualized basis noting economic anomalies that boosted consumption above incomes for a period of time.


    While one should never count the consumer out in terms of their contribution to the economy; the annualized trends, from a historical perspective, should lead to some discussion about the real underlying supports of the economy.

    While the recent income report was certainly good news – the stagnation in expenditures, combined with a sharp rise in personal savings, doesn’t bode well for the near term.  With wage increases tied to consumer demand the most recent bump could be a temporary anomaly of wages being adjusted to keep from losing current employees to competitors in a very tight labor market.  The key will be to see strong employment increases above the rate of population growth, rising labor participation rates and continued increases in wages.  This would be very indicative of a strongly growing economic environment.  Currently, that is not the case.

    Economic “change” happens at the margin.  It will require several more months of stronger economic growth to establish a change in the currently negative annualized data trends in most of the economic reports to support the expectations of stronger economic growth in 2014.  The question is whether Bernanke pulls support from the economy too soon by misinterpreting short term adjustments in economic activity for improving trends?

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of Streettalk Live

    lance robertsAfter having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.