Disposable personal income (DPI) and personal consumption expenditures (PCE) gained 0.2% and 0.4%, respectively, vs. flat performance in June, the Bureau of Economic Analysis reported today. That’s encouraging, as these things go in the summer of 2010. But as usual, the fine print leaves room for debate.
Let’s start by looking at recent history in context, as shown by the first chart below. Income and spending rose last month, but nothing’s really changed relative to the trend over the past year. Growth is light, compared with pre-recession days. The question is how long it’ll stay light? At the moment, the crowd’s inclined to err on the side of caution until fresh numbers suggest otherwise, and today’s spending and income updates don’t do the trick.
One month a trend does not make, but consumers spent more than they earned in July. Higher savings reduces consumption, of course, and that’s a risk if the economy isn’t growing below trend. But there’s a conflict to consider too. On the one hand, higher savings rate are a worry for the economy in the near term, and so today’s bounce in consumption is what the bulls want to see. But it’s highly likely (if not inevitable) that Joe Sixpack will be saving more in the future to pay off debt and rebalance household balance sheets after the spending binge of past years. As such, to the extent the consumer spends more than he earns today, that implies that future growth in consumption will be lower. There’s a price to pay for short-term happiness.
To see a richer measure of the big-picture trend, consider the second chart, which shows the rolling 12-month percentage change for income and spending for the past decade. The trend has turned up since the dark days of 2008/2009, but so far the rebound has been weak, and there’s little in the way of persuasive arguments for expecting a material change for the better in the immediate future.
But the case for expecting the economy to muddle through isn’t yet lost, or so one economist advised. “All in all, July’s report supports our view that consumer spending will continue to recover, albeit modestly, supported by a gradual improvement in labor income,” wrote Peter Newland, an economist at Barclays Capital Research via The Washington Post. That’s the optimistic outlook, such as it is.
Stephen Stanley, chief economist at Pierpont Securities, echoed that sentiment, telling Bloomberg: “It’ll be a real slog. We’ll see very slow growth, but it’s a far cry from a double dip.”
The future for the macroeconomic mystery still depends heavily on the labor market and wages. The good news is that wages are rising, which is critical to fuel ongoing economic growth. The bad news is that the economy’s still not adding workers at anything close to a robust pace, although perhaps this Friday’s employment report will tell us different. Only the combination of rising employment and rising wages will deliver an end to the challenges that bedevil the business cycle.
Meantime, wages for those who are employed remain in a growth mode, as the third chart below shows. Half a solution is better than none.
The rebound in wages is encouraging, but it’s still got a long way to go. The 1.8% rise over the year through last month is a world away from the contractions of the recent past. But we’re hardly any closer to the 6-8% annual gains that prevailed before the Great Recession. Deciding how much of a rebound in wages (and job creation) is still the burning issue and it’s going to take time to figure out the answer.