Today’s update on personal income and spending reminds that the attack on the consumer rolls on.
As our chart below suggests, the recession is bearing down on Joe Sixpack and the pressure isn’t likely to ebb for some time. Disposable personal income was flat to slightly down last month on an annualized seasonally adjusted basis. Personal consumption expenditures fared a bit better, posting a roughly 0.2% rise in February, but that looks like statistical noise and a reaction to the sharp pullback from previous months. Given the sober outlook for the labor market, there’s little hope that we’ll see much improvement for spending or income any time soon. As the crowd comes to terms with the economic backdrop, we’re likely to see ongoing retrenchment in the late, great consumption binge.
But for the moment there’s another threat to watch: inflation. Yes, we’ve been talking about deflation these past few months, and based on the numbers published late last year it looked like the potential for a deflationary spiral was quite real. But it was only a true threat if the Federal Reserve dithered and let deflation take root. As we’ve discussed, the Fed did no such thing and instead has acted aggressively in combating the threat by flooding the system with liquidity. Given the economic context, a fair amount of the liquidity is sitting idle—i.e., the classic problem of pushing on a string, as they say. Indeed, quite a bit of the newly minted liquidity has been redeployed into nonproductive areas, i.e., safe havens, which is why short-term Treasury bill yields remain at roughly zero, if not slightly negative. When the liquidity starts to come out of hibernation, the potential for inflation will rise.