Let’s get right to the point: the American consumer isn’t easily distracted. A recession may be looming, the housing market may be swooning, but Joe Sixpack isn’t easily discouraged from indulging in the great American pastime otherwise known as shopping.
As he has so many times in the past, Joe’s keeping the economy bubbling in 2007, as this morning’s update on personal income and spending reminds. In fact, the extraordinary staying power of the American consumer is that much more amazing as it comes in the face of lesser personal income last month. In theory, income and spending are joined at the hip. If you earn less, you spend less; earn more, spend more. No explanation needed. But that seemingly iron law only applies in the long run, and even then there’s room for debate in a world of easy loans and a myriad of innovations to keep shopping habits alive and kicking. And once you turn to the short term, well, let’s just say that logic and mathematical certainty are as ephemeral as the wind.
Consider the latest reading on consumer spending, which accounts for the lion’s share of GDP. The government today reported that personal consumption expenditures (PCE) rose 0.56% in August vs. July. As our chart below illustrates, that’s the highest monthly pace since April. Last month’s rise is all the more impressive considering that it was accompanied by a lesser rate of increase in disposable income.
The notion that the economy may be bubbling more than some think also finds support in yesterday’s initial jobless claims report. Last week’s new filings for unemployment benefits fell to a four-month low, which implies that the outlook for economic momentum still looks healthy. Then again, this encouraging news was tempered by Thursday’s report on new home sales for August, which confirmed what was already obvious: the housing market remains mired in a slump. Indeed, sales of new homes fell in August to the lowest annualized rate in seven years.