They say that you should never underestimate the consumer, and Friday morning's update on personal income and spending is a reminder of just how practical that proverb can be. Yes, a recession may be coming, but if the gloomy analysis is having an impact on Joe Sixpack, it's not obvious in the latest data from the Bureau of Economic Analysis.
Admittedly, disposable personal income isn't exactly soaring, although it rose at a higher pace last month versus October (0.4% compared to 0.2%). At least the trend is encouraging given that we're told an economic slowdown is upon us.
But the real news is in the spending column. In particular, personal consumption expenditures soared by 1.1% last month. As our chart below shows, that's impressive by recent standards. In fact, the last time PCE jumped so high was more than two years ago.
Granted, November always enjoys a seasonal burst of holiday shopping, although even by that standard holiday cheer of late is running considerably hotter in 2007.
It's debatable if the fun can continue, but for the moment there's no doubt that Joe's still spending, and then some. And since the American economy is powered primarily by consumer spending, an outlook premised on Joe being the same old Joe implies the bulls still have reason to cheer.
Nonetheless, one might wonder what 2008 will bring. Consider that in inflation-adjusted terms, disposable personal income actually dropped for the second month running in November. Even so, Joe still spent more, a lot more, last month in real terms: November's inflation-adjusted PCE climbed 0.5%, up sharply from October's 0.1%.
As always, the data's open to interpretation. The optimistic view is that consumer spending reigns supreme. And with the Federal Reserve still leaning toward more rather than less liquidity, one might be persuaded that the tail wind for spending is still blowing rather strongly. Joe, it seems, is in no mood to fight the Fed.
But for those who prefer to worry, there's the question of whether Joe's spending can maintain a hefty pace next year when there's so much trouble brewing elsewhere in the economy. Then again, consumers haven't been shy about running up a credit card bill or two. Will such inclinations fade in '08? Will the central bank keep lowering interest rates? Does that mean that even higher inflation is coming? Questions, questions, always the questions.