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Last week’s update on personal income and spending rattled some analysts because the report showed that consumption fell 0.1% in April vs. the previous month. By some accounts, this is a clear sign that the economy is in trouble. Maybe, but that’s premature at this point. No matter how hard you scrub the monthly comparisons, they’re usually too volatile to draw reliable conclusions about the big-picture trend–a caveat that surely applies to the latest spending data.

Although the monthly decline in April looks discouraging, there’s a reasonable explanation for the sudden weakness. April’s mild retreat in personal consumption expenditures (PCE) follows a sharp rise in March. It’s hardly surprising that consumers pared spending after going on a binge. Indeed, March’s 1.0% gain is the biggest monthly advance in nearly five years.

As a general rule, however, it’s best to monitor year-over-year changes in the search for signals of recession risk. By that standard, you won’t find a smoking gun in the latest PCE numbers. As the chart below shows, spending increased 4.3% for the year through April—the best rate in two years.

(click to enlarge)

Adjusting for inflation, PCE is up 2.7% on a year-over-year basis in real terms. That’s not as strong as nominal PCE, but it’s still relatively high in comparison with recent history.

(click to enlarge)

Consumer spending, important as it is for macro analysis, still requires broader context for evaluating the economic trend and so we should look to a spectrum of numbers. As I discuss in some detail in Nowcasting The Business Cycle, a broad measure of carefully selected economic and financial indicators is essential. The good news: a diversified set of numbers still suggests that the economic expansion looks set to roll on, as shown in last month’s Economic Profile.

Yes, there’s always another recession waiting in the wings. But if you see one on the immediate horizon at the moment it’s probably because you’re making the mistake of cherry picking the numbers and/or focusing on short-term comparisons. The next round of updates may tell us otherwise, but for now the expansion remains on track.

Source: Is April's Drop In Consumer Spending A False Warning?