The markets tanked last month, signaling trouble ahead. Yet consumer spending and income rose in May, the government reported this morning. Were the bears wrong? Maybe, but that’s not yet obvious, despite the gains in today’s economics stats.

As always, the burning question is whether Mr. Market’s expectations writ large are accurate, or just the latest incarnation of speculative fever gone haywire? No matter your answer, there’s always doubt. Nonetheless, the recent selling that’s taken a toll on asset prices lately is a legitimate signal that the dangers are rising for the economic recovery. How much of a danger is open to debate, of course. And on the surface, it’s a bit easier to argue that the selling was overdone, based on today’s income and spending report for May.
Disposable personal income rose by a solid 0.4% last month, according to the U.S. Bureau of Economic Analysis. Personal consumption expenditures advanced by half as much, although on a monthly basis May’s progress on these twin fronts contradicts the bearish sentiment in the stock market of late. Was it all a false warning? No, at least it’s premature to declare the new new deflationary threat is dead and buried. Indeed, today’s monthly numbers in spending and income mask the larger trend taking its toll on income.
As the chart below highlights, the rolling 12-month percentage change in disposable personal income (DPI) suffered its biggest percentage downshift last month since this time last year, when the fallout from the Great Recession was still blowing through the numbers and the Great Reflation had yet to kick in. The year-over-year pace of growth in nominal DPI was 1.7% last month, down from a 3% annual rate of increase in April. The good news is that DPI is still rising on an annual basis, but no one can dismiss the downshift last month given the recent uptick in risk aversion. And since the broader trend is the more reliable signal for the economy vs. monthly numbers, there’s reason to wonder what’s coming.

Perhaps it’s all statistical noise, of course. No doubt the crowd will pay more attention to the news that consumer spending broadly defined rose last month by more than the consensus outlook anticipated. “The U.S. consumer remains resilient,” Sal Guatieri, a senior economist at BMO Capital Markets, told Bloomberg News. “As long as jobs are coming back people will continue to spend.”
On that point we can all agree, bear and bull alike: jobs are (still) the key. Keeping the pace of income growth positive depends on the labor market. On that note, what would convince us that the sharp drop in the annual pace of DPI’s growth is a one-time event with no larger significance for the economic recovery? A strong employment report for June (scheduled for release this Friday) would go a long way in soothing our anxiety. Unfortunately, the outlook isn’t promising, based on current forecasts. Nonfarm payrolls are set to fall by 100,000 for June, according to the consensus outllook among economists, according to Briefing.com.
Forecasts can be wrong, of course. But not always. Meantime, there’s a lot of economic territory between now and Friday. It’s going to be a long week.