January 30, 2012
A Troubling Trend For Income & Spending Rolls On
American consumers are spending less and saving more. That's the message in yesterday's personal income and consumption report for December from the Bureau of Economic Analysis. That's a healthy development for household balance sheets and, in the long run, it's a plus for the economy. But if you're looking for a fresh sign that the economy will avoid a recession, it's not clear that these numbers will suffice.
Let's start with the good news. Disposable personal income (DPI) rebounded nicely last month, rising 0.4% in December. That's the biggest monthly gain since March and a clear reversal of the sluggish numbers in recent months. But as the chart below shows, consumption growth has evaporated, with personal consumption expenditures (PCE) posting a slight retreat in December. For an economy that relies heavily on consumer spending, that's a warning sign.
The trend, of course, is the true measure to watch for evaluating the business cycle, and on this front the news continues to look troubling. As you can see in the second chart below, the year-over-year percentage change in both DPI and PCE continues to fall. Even December's relatively strong rise in DPI wasn't enough to slow the decline. PCE's year-over-year change also continues to drop. That's not an encouraging sign for the business cycle.
What force might intervene to keep the forces of contraction at bay for income and spending? A stronger labor market, of course. That may be asking for too much at this point, but the case for hope isn't over yet. Private-sector wages are still growing at a healthy clip, rising 0.5% in December, which translates into an annual rise of 4.6%--the fastest annual rate since last April. Another bit of good news: average weekly hours worked for production and nonsupervisory employees in the private sector is still trending higher, suggesting that the labor market is expanding.
The next question is whether we'll see continued job growth. Alas, the outlook doesn't look particularly robust at the moment, according to the consensus forecast for this Friday's update for private nonfarm payrolls. Economists are predicting private payrolls will add a net 168,000 positions in December, down substantailly from 212,000 in November, according to Briefing.com. If that's an accurate forecast, it'll be a disappointment.
A few analysts argue that a new recession has already started in the U.S. The ongoing deceleration in the annual pace of spending and income supports that diagnosis. Arguing otherwise will require some strongly positive numbers in the next round of economic reports, particularly for the labor market. On that score, the next three days will deliver a trio of readings on the employment trend: tomorrow's ADP Employment Report, Thursday's initial jobless claims, and Friday's nonfarm payrolls update.
Posted by jp at January 30, 2012 5:19 PM
I didn't say that higher income and lower spending is surprising. Rather, the point here is that the trend--the rolling 12-month % change--seems to have downward momentum, which implies trouble ahead unless it soon stabilizes or reverses. Roughly 70% of US GDP is related to consumer spending. Eventually, the math helps or hurts.
Posted by: Davel at January 31, 2012 8:27 PM
John Hussman of the Hussman Funds and the Economic Cycle Research Institute are predicting recessions. For some links and context, see my recent post here:
Posted by: JP at January 31, 2012 8:22 PM
Hi, you mention "A few analysts argue that a new recession has already started in the U.S."
Could you point me to a few sources? I have been trying to find informed opinions on the subject for the last few days.
Posted by: Abhishek at January 31, 2012 12:23 PM
Your first chart shows the consumer is increasing spending while income is slowing.
Why is it a surprise that in the XMas qtr a rise in income because of the short term hires for December would show they are keeping their money?
Posted by: davel at January 31, 2012 12:00 PM