Consumer Spending: Up, Down or Flat?

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by: James Picerno

On the surface, consumer spending appears to be holding up, and surprisingly well, considering the barrage of discouraging economic and financial trends harassing the waking hours of our hero, Joe Sixpack, of late.

Friday morning's update on personal income and spending in January revealed that personal consumption expenditures rose 0.4% last month, up slightly from December's 0.3%. That's about average if we look at the past two years of monthly PCE spending patterns. If we leave it there, we can say that at least in nominal terms, Joe's spending habits haven't changed much. If one extends this thought, then perhaps worries of recession are excessive. After all, consumer spending represents 70% or so of GDP; if Joe's still pulling out his wallet as always, the odds of a deep and/or lasting economic stumble may be overbaked.

But as regular readers of this site are all too aware, we're never willing to "leave it there." Obsessed with the idea that there may be a more granular truth lurking in the numbers, we push on, wondering if we've missed something in the 30,000-foot survey.

On that note, let's dive a bit deeper into Friday's spending update by noting that the 0.4% rise in PCE last month all but evaporates when we adjust for inflation. Real PCE spending was unchanged (based on rounding to one decimal point) in January. In fact, that's the second month running that real PCE was flat, and it was the third instance in the last four months. Stepping back and looking at the broader trend in real personal consumption spending only reaffirms the message in the last few months, namely, a slowdown in Joe's willingness and/or ability to spend after stripping out inflation, as our chart below illustrates.

If the trend raises questions about the future, breaking out real spending by the major categories provides even more incentive for staying cautious on the question of, What's next? Durable goods spending last month fell by 1.3% last month from December, measured in real terms at a seasonably adjusted rate - the fourth monthly decline in a row. Nondurable goods spending also slipped, albeit at a comparatively modest -0.2%. Only services-related spending managed to rise in real terms last month, advancing by 0.4%.

The implication is that consumer spending, after cutting away the distorting cloud of inflation, is generally falling, and arguably looks set for more of the same in the foreseeable future. The hope is that the Fed and Congress can arrest the trend via rate cuts and fiscal stimulus, respectively. Perhaps, although there's a cost to everything, starting with the risk of trading a cyclical downturn for higher inflation. In addition, there's the added worry that even if Washington is able to engineer a bounce in consumer spending, the effect will be temporary and so a "W" recovery may be coming. That is, we'll see a modest bounce down the road, but it'll give way to another dip before the real upturn takes root.

This is all speculation, of course, and so this essay may end up being one more hockey puck added the junk yard of discredited analytics. So it goes in attempting the impossible: forecasting tomorrow with yesterday's data. To which the only antidote is watching, waiting and looking at the new numbers as they come in, which is the worst possible solution except when compared to the alternatives (our apologies to Churchill). Stay tuned.