Consumer spending rose sharply in February, the Bureau of Economic Analysis reports. Unfortunately, income growth was weak again last month, raising fresh worries about the economic outlook.
It’s tempting to focus on the spending side of the ledger, where personal consumption expenditures (PCE) soared 0.79%. Bloomberg, for instance, ran a story this morning with the headline: “Consumer Spending in U.S. Climbs 0.8%, More Than Forecast.” Indeed, last month witnessed the strongest gain for PCE since August 2009. But no one should ignore the problem with disposable personal income (DPI), which rose a mere 0.16% last month. That’s slightly better than January’s near-flat 0.04% rise, but there’s not enough juice here to overcome the concern that the income trend is in trouble.
The monthly numbers per se are the least of our worries. The bigger concern is that DPI’s sliding growth rate shows no sign of stabilizing, much less reversing in terms of its year-over-year pace. As the second chart below shows, DPI’s deceleration on this front is becoming more pronounced, slipping to a modest 2.65% annual increase for the year through last month—the slowest in nearly two years. The fact that the rate of growth has been consistently falling for months is even more disturbing. This warning sign has been a concern on these pages for for months, and today’s update offers no reason to think differently. If the slowdown in DPI rolls on, the odds increase that the economy will stumble, perhaps even suffer a new recession. There’s a lot that has to happen before we get to the point of no return, but today’s income numbers boost the risk a bit more.
One reason for remaining hopeful in the recent past has been the relatively buoyant trend in private sector wages, which account for roughly 43% of personal income. The reasoning here is that if wages are climbing at a healthy rate, growth overall has a better chance at survival. But is that pillar of support now crumbling too? Wage growth has been moderating on a monthly basis recently and the slowdown knocked down the annual rate to 5.38% in February—the slowest year-over-year pace since last August. Maybe it’s just noise, but until the next update the jury’s out.
The bottom line: If the headwinds for income growth persist, it’s only a matter of time before the trouble infects consumption. If it comes to that, the cyclical jig will be up. Perhaps the only way out is if job growth continues to accelerate, as it has in recent months. A surprisingly strong employment report would surely help at this point. In fact, anything less would ikely be fatal at this stage. It’s anyone’s guess if next Friday’s payrolls update for March will comply, although the continued decline in new jobless claims suggests that the labor market hasn’t rolled over, at least not yet.
But until—if?—personal income growth revives, or at least stops falling, there’s a dark cloud hanging over the macro horizon. Lightening may not strike in the near-term future, but if the sky continues to darken by way of the weakening income trend, it’s getting easier to assume that a storm is coming. Is this future fate? Not yet, but we’ll need to see quite a bit of good news in the next round of economic reports to minimize the concern brewing with DPI.