This past week we analyzed the latest BEA release on personal income and expenditure. The bottom line was Joe's income was up, his spending was down. Joe seems to be marginally hunkering down.
Most of us are Joe Sixpacks, but as all Joe's are different - it is hard to pinpoint causation of why this happened. The graph below illustrates the relationship between income (DPI) and expenditures (PCE).
Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Expenditures (red line).
click to enlarge image
The above graph is indexed, and shows the growth rate between Joe's income and expenditure have a very high correlation over the long run. The above graph also shows that the economy of the consumer has not stabilized since the Great Recession showing uneven income and expenditure growth.
Note: The normalization of both metrics to their January 2000 values allows us to see how each compares to that reference over time: sometimes one is higher vs. the reference month and sometimes the other. It does not reflect that the absolute values are bigger or smaller at different times - DPI is always larger than PCE (on average income is 7% higher than expenditure), as shown in the following ratio graph.
Seasonally Adjusted Spending Ratio to Income (a declining ratio means consumer is spending less of Income):
The consumer between mid 2010 through 2011 was continuing to spend more of his income (and therefore saving less) - but in 2012 this trend has reversed, and now the consumer is spending less of its income.
What we know based on the data is that consumers started spending less of their income beginning in December 2011. And, except for the growth spurt that ended in November 2011, Joe has not returned to his old pre-recession ways. However, after looking stronger than after the 2001 recession the ratio has fallen back to value similar to the first two years following the 2001 recession. The only problem with that is we are now three years after the 2007-09 recession.
My opinion is that this short term trend is being caused by Joes uncertainty of future economic conditions. It does not take much delay for decreased consumption to show detrimental economic effects since the consumer is between 2/3 and 3/4 of the economy (depending on what one thinks the economy is).
Joe is spending about 1% less of his income compared to six months ago. A 1% change in Joes buying habits can move GDP over 0.6%, and could begin a cascade into other portions of GDP.
Hopefully the misleading advertisements of the political candidates will add enough to the economy to overcome the effects of Joe's uncertainty. On the other hand, this may be what is adding to the uncertainty.
My normal weekly economic review was posted in my instablog. I have focused on last Friday's BLS jobs report which I believe is being politicized, and is better than pundit's criticisms.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
