Personal income and spending rose in August, the U.S. Bureau of Economic Analysis reports, although the increase on the income side of the ledger was sluggish in nominal terms (and actually fell last month after adjusting for inflation). Personal consumption expenditures, on the other hand, had a much stronger month, rising the most since February. Some of the higher spending was due to rising gasoline prices. Nonetheless, consumers were willing to spend more on durable goods, which suggests that there's still some capacity to open the wallet for discretionary items. Overall, today’s income and spending numbers suggest that the economy still has forward momentum. If you’re looking for a clear sign that a recession is near (or recently started), you won’t find it here.
Here’s how income and spending compare on a monthly basis. Notably, consumption has been picking up in the last two months. Income, on the other hand, is growing weakly relative to earlier this year.
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Month-to-month comparisons can be misleading, however, and so looking at year-over-year changes cuts through the noise a bit. What we find is a relatively encouraging sign: the annual pace of growth for income and spending is no longer decelerating. Both series are rising vs. their year-earlier levels and, more importantly, at slightly faster rates. The growth is hardly stellar, but the trend certainly looks favorable, if only on the margins.
The data tells a similar story after adjusting for inflation, albeit with a somewhat less dramatic turnaround angle. But it’s hard to miss the fact that the annual rates of real income and spending growth seem to be stabilizing around the 2% mark. The implication: the consumer’s contribution to economic growth remains in the net-plus column.
Another signal that consumer spending is holding its own comes from tracking real durable goods consumption on a year-over-year basis. Spending on big-ticket items rose 8.1% in August in inflation-adjusted terms. That's up from July's 7.2% pace and near the highest rates since the recession ended. In other words, last month's spending pop was more than paying higher prices at the pump.
There’s always a danger of reading too much into one data series in the search for clues about the broader economy. But as key factors for divining the general trend, consumer spending and income have no equals in terms of influence for GDP. As such, it’s reassuring to see that these indicators are still growing on a year-over-year basis. History suggests that recession risk is rising when the growth rate of income and spending is persistently slipping on an annual basis. To the extent that’s not happening — and it’s not — there’s one more reason for thinking that slow growth for the economy overall is still a reasonable guesstimate.
But let’s not minimize the risks. With gasoline prices on the rise again, and consumption and income growing moderately at best, there’s little confidence for extrapolating today's numbers deep into the future.
“The consumer is not going to be able to lead the recovery,” says Ryan Sweet, a senior economist for Moody’s Analytics. “We’re headed into a few months of soft consumer spending. Even though gas prices look like they may be peaking for the year, that’s going to weigh on spending for the next month or so.”
Yes, it seems that the income and spending numbers for August dodged a bullet. But that’s still a long way from arguing that all’s well, or that the next batch of data won’t bring negative surprises. That said, the consumer doesn’t appear to be intimidated, at least not yet. A measure of consumer sentiment (via the University of Michigan-Thomson Reuters index) jumped to 78.3 for September, up from 74.3 in August. There’s no shortage of things to worry about, but Joe Sixpack (rightly or wrongly) is keeping a stiff upper lip.