Joe Sixpack’s demise as a consuming animal has been widely predicted for some time, but greatly exaggerated, to judge by yesterday’s update on personal income and outlays for January.
The Bureau of Economic Analysis reported that personal income rose by a healthy 0.7% in January over December. But as is the inclination these days, Joe and his counterparts across the country spent more than they made in the first month of 2006 by elevating spending by 0.9%.
The trend of spending in excess of income is nothing new in the American economy. Deficit spending generally is very much the fashion these days, in both government and on the homestead. And if one defines the money supply by the M3 series, the central bank seems only to happy to make sure that everyone has enough paper to keep the spending train in motion.
One only has to look at the state of Joe’s income and outlays to find the evidence of said rolling on the consumer front. Indeed, for the third month running, the percentage change in consumption expenditures has risen at a rate above that of personal income’s advance. Going back over time, that’s far from atypical. To be sure, elevating one’s spending by a pace that exceeds income growth will eventually hit a brick wall, although one could die waiting for such economic constraint to kick in when it comes to our beloved Joe.
But for all the anxiety that persistent consumer spending causes among dismal scientists, the trend is clearly a boon to the economy, which relies overwhelmingly on Joe and his friends for expansion in gross domestic product. And in light of yesterday’s update on personal income and outlays, it’s a little harder to argue that this party’s about to end.
Case in point: spending is heavily dependent on income growth, and the connection looks intact. For starters, employment growth keeps chugging along, which in turn is putting a potent tailwind behind wage and income growth. Indeed, January’s 0.7% rise in income was the strongest since September 2004. Joe may be digging himself into a debt hole, but if his income keeps rising at this rate it could be a long time before the red-ink ditch spawns any blowback.
Adding to the belief that Joe and his cohorts will keep spending comes by way of yesterday’s release of the February ISM Manufacturing Index. Challenging the notion that an economic slowdown is in the offing, this widely followed index continues to exhibit strength. Last month, ISM Manufacturing rose to 56.7, the highest since November 2005, and up from January’s 54.8. Any reading above 50 implies an expanding manufacturing sector, and by extension, a robust economy overall, and so recent readings are clearly bullish.
The smoking guns of late may be changing the bond market’s nonchalant mood, although this line of prediction too has been a less-than-fruitful exercise in recent years. Nonetheless, the benchmark 10-year Treasury yield is at 4.60% as we write this morning, the highest since mid-February.
Whether any of this persuades some rethinking among the pessimists on the outlook for the economy is an open debate, and an important one at that. The folks at the giant bond shop Pimco, for instance, expect a stumble triggered by a housing slowdown. And in fact, there’s been some evidence this week that real estate may be cooling.
But Joe Sixpack doesn’t give up his spending habits easily. As a result, the pressing question at the moment centers on whether any slippage in the property market will offset any gains in wages and income. The bond market overall seems unsure. Anyone else willing to take a crack at a prediction?