September 28, 2007
Let's get right to the point: the American consumer isn't easily distracted. A recession may be looming, the housing market may be swooning, but Joe Sixpack isn't easily discouraged from indulging in the great American pastime otherwise known as shopping.
As he has so many times in the past, Joe's keeping the economy bubbling in 2007, as this morning's update on personal income and spending reminds. In fact, the extraordinary staying power of the American consumer is that much more amazing as it comes in the face of lesser personal income last month. In theory, income and spending are joined at the hip. If you earn less, you spend less; earn more, spend more. No explanation needed. But that seemingly iron law only applies in the long run, and even then there's room for debate in a world of easy loans and a myriad of innovations to keep shopping habits alive and kicking. And once you turn to the short term, well, let's just say that logic and mathematical certainty are as ephemeral as the wind.
Consider the latest reading on consumer spending, which accounts for the lion's share of GDP. The government today reported that personal consumption expenditures (PCE) rose 0.56% in August vs. July. As our chart below illustrates, that's the highest monthly pace since April. Last month's rise is all the more impressive considering that it was accompanied by a lesser rate of increase in disposable income.
The notion that the economy may be bubbling more than some think also finds support in yesterday's initial jobless claims report. Last week's new filings for unemployment benefits fell to a four-month low, which implies that the outlook for economic momentum still looks healthy. Then again, this encouraging news was tempered by Thursday's report on new home sales for August, which confirmed what was already obvious: the housing market remains mired in a slump. Indeed, sales of new homes fell in August to the lowest annualized rate in seven years.
But for the moment, there's no obvious sign that the housing problems are spilling over into the labor market. That may soon change, and more than a few analysts are warning of no less. Perhaps, although Joe's still spending as we write. Even so, before we break out the champagne, it's worth taking a look at the broader context for consumer spending trends. As our second chart below indicates, there's reason to stay cautious about the coming months based on the fact that changes in PCE on a rolling 3- and 12-month basis is slowing.
This is a good time to point out that consumer spending can still grow in the midst of tough times for the economy overall. Take another look at the chart above and recall that during 2000-2002 the financial markets suffered their worst stretch in 30 years. Yet consumer spending at the time kept growing for the most part. Of course, the growth was relatively meager.
Is the growth of consumer spending fated to become meager once again? If so, what are the implications for the overall economy and the capital markets? Stay tuned.
Posted by jp at September 28, 2007 9:49 AM
We did in indeed misquote PCE's August rise. The chart, however, was right. We should have reported that PCE rose 0.56% in August--not 5.6%. Also, the 0.56% August rise was the fastest pace since April 2007, not May 2007 as we initially reported. Both have been corrected. Sorry.
Please note that we now keep a running tab of our our errors and omissions in the Errata & Elaboration section, which has a link in the upper-left-hand corner of The Capital Spectator's home page. We can't promise to be 100% error free, but at least we can keep readers apprised of where and when we goofed.
Posted by: JP at September 29, 2007 3:47 PM
You wrote that PCE rose 5.6% between August and July. But in the chart it looks more like 0.56%. Is the y-axis wrong?
Posted by: Aaron at September 28, 2007 1:15 PM