It's The Consumer, Stupid!
Early-year tax increases and higher gasoline prices have probably dented U.S. consumer expenditures and as Bloomberg's Joseph Brusuelas notes, tomorrow's report of July’s personal income and spending report may illustrate the weakness that poses a significant risk to the much-anticipated economic growth renaissance in the second half of the year.
Via Joseph Brusuelas, Bloomberg Briefs,
The drawing down of personal savings and the flattening out of government transfers indicate that real wage gains must accelerate to support the optimistic Bloomberg consensus forecast that the U.S. economy will expand at the long-term trend growth rate of 2.5 percent in the second half of the year. Acceleration in wage gains can only happen if the pace of job gains, which has slowed during the past three months, increases.
Based on current data, it is going to be difficult for consumers to eke out a gain in disposable income in July. Real personal disposable income is up 1.7 on a year-ago basis and has increased just 0.4 percent when adjusted for inflation.
Nominal Income Doesn't Reflect Impact of Policy / Gas Prices (Yet)
The July non-farm payroll report showed a 0.1 percent decline in average hourly earnings and a 0.4 percent decline in average weekly earnings. Both expanded at a 1.9 percent rate on a year-ago basis, just below the 2 percent expansion in personal consumption expenditures. This suggests that Bloomberg consensus expectations for a 0.3 percent increase in spending may be overly optimistic. While retail spending on items excluding autos, building, materials and gasoline expanded at a 0.5 percent rate, lower outlays on auto sales, utilities and relative weakness in back-to-school spending indicate the consumer remains constrained.
The near 2 percent year-over-year pace of real personal consumption expenditures is due to two factors.
First, government transfers have helped fill the gap in wages and spending since the start of the recession.
Second, households have consistently drawn down savings to support higher levels of spending than their incomes alone can support.
These conditions cannot persist indefinitely.
Consumers Using Savings To Maintain Spending Levels
Since the first quarter of 2011 – with exception of the final quarter of 2012 when many upper income households pulled forward compensation to avoid the tax hike on Jan. 1, 2013 – the savings rate on a year-ago basis has declined and is down 1 percent through the second quarter of this year.
Real Wages Likely To Remain Tepid
Meanwhile, the gap between inflation-adjusted per capita disposable income and real personal consumption expenditures shows that households have yet to adjust to reduced incomes. While households have increased spending at a 1.7 percent rate, slightly above the 20-year average rate of inflation, they have seen adjusted per capita income gains of just 0.4 percent.
Thus, the ability to increase spending now rests on either households ramping up leverage and continuing to draw down savings, or on the Federal government expanding transfer payments. Neither appears likely given the increasing probability of another game of budgetary brinksmanship in Washington and the low-wage bias that has been a persistent feature of the economic recovery.
Source: Bloomberg Briefs
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