The assumption by some economists that consumer spending and income is “rolling over” took a blow in today’s February update from the Bureau of Economic Analysis. Disposable personal income (DPI) increased a respectable 1.1% last month while personal consumption expenditures (PCE) advanced 0.7% in February, or the most in five months. The year-over-year trends for both series looks sluggish, however, which certainly doesn’t inspire confidence about the second quarter and beyond. But based on the numbers through February, it’s still a tough case to argue that DPI and PCE are caught in a downward spiral.
Context is important these days because DPI has been unusually volatile lately, thanks in large measure to the impact of so-called “accelerated bonuses” in anticipation of tax hikes via the fiscal cliff, which was still a real and present danger in the final weeks of 2012. But as that one-time event recedes into history, along with the wild swings that were unleashed in its wake, DPI has returned to something approximating normal behavior and the recent trend of moderate growth appears to be intact once more.
The same can be said for consumer spending, with March data reflecting the biggest rise last September. Actually, today’s relatively upbeat news on PCE isn’t much of a surprise, given that the previously released February retail sales report was also the strongest in five months.
Last month’s modest rebound in the annual pace of growth for DPI is encouraging, although the 2.3% year-over-year change through last month (vs. 1.8% in January) is still sluggish compared with recent history and so there’s elevated uncertainty about where this indicator is headed in the months to come. The 3.3% annual increase for PCE through February looks better, but here too the pace is at the low end for the post-recession years and so the updates over the next few months may be critical for assessing business cycle risk.
For now, it’s fair to say that spending and income continue to post moderate gains. Although neither indicator’s growth looks particularly strong for the annual comparisons, it’s unclear if this is just a sign of the slow-growth times or something more ominous. Pessimists are inclined to favor the latter view, but a dark analysis still looks overbaked based on the relatively upbeat trends that prevail across a broad array of indicators. When that changes, we’ll have a real reason to worry. For now, assuming the worst remains little more at a guess, and one that’s been wrong for some time.