For the first time in a year, monthly consumer spending dropped, the U.S. Bureau of Economic Analysis reports. Personal consumption expenditures (PCE) fell 0.2% in June as disposable personal income rose by a slight 0.1%. Joe Sixpack’s inclination to spend, it seems, is drying up. Indeed, PCE’s monthly pace has been descending non-stop since March and the latest number reflects outright decline. (Some news outlets are reporting that consumer spending, as per today’s revised numbers for PCE, fell in June for the first time in nearly two years. In fact, there was a slight 0.04% drop in June 2010, although rounding changes this to zero.)
Suffice to say that the trend in PCE isn’t encouraging. There’s no shortage of incentives for consumers to save more and spend less these days, but that won’t diminish the macro pain for an economy that relies primarily on Joe Sixpack’s consumption habits.
On the other hand, there’s nothing particularly new in today’s numbers. We already knew that second-quarter GDP growth was weak. After reading today’s income and spending report for June, we have more detail on why it was weak.
An optimist might say that with the threat of a Treasury default no longer looming, consumer confidence may pick up in the months ahead. Perhaps, but one could just as easily counter that the budget deal spells trouble for the economy because of the anticipated cuts in government spending at a time when economic growth is subpar.
In other words, it seems we’ve solved one source of uncertainty and replaced it with another. Is the emphasis on fiscal austerity good news for the economy in the short term? Or are we facing a fresh hurdle? Only time will tell, although depending on your dismal scientist of preference, you can find almost any prediction you’re looking for. History, however, suggests we should worry as the record on imposing fiscal austerity in periods of weak growth triggered by a financial crisis isn’t encouraging. Or perhaps the Fed will offset the fiscal cutting with QE3? Questions, questions, always more questions.
Meantime, the trend continues to hold its ground, based on the numbers in hand. As the chart below shows, the rolling one-year percentage changes for spending and income, although off their recent highs, still suggest growth will prevail. Nonetheless, the margin of comfort is slim. If June’s income and spending report is a harbinger of things to come, the trend will suffer.
The good news is that private-sector wages are still growing at an encouraging pace vs. the year-earlier period. That implies that consumer spending isn’t headed for the skids. And while industrial production’s annual pace has slowed considerably, it’s still well above stall speed. Even the sharp slowdown in jobs creation has yet to put stress on the labor market trend. Private nonfarm payrolls were higher in June by roughly 1.6% over the past year, or near the best levels since the recession formally ended two years ago.
None of this is a guarantee that a recession will be averted, but there’s not yet a smoking gun for the dark side either. “The recent run of weak economic news has made us more concerned that any rebound will be more modest than previously looked likely,” opines Paul Dales, senior U.S. economist at Capital Economics. Deciding if there’s more, or less, to this reasonable outlook will take time.
It’s still going to be a long, hot August.