Is the sluggish economy finally inspiring consumers to implement a self-imposed round of personal austerity? It looks that way after reading today’s update of personal spending and income for May. Disposable personal income rose modestly by 0.2% last month, matching April’s gain and posting the eighth straight monthly increase. But personal consumption expenditures were virtually unchanged in May, rising by the smallest of margins and thereby delivering the weakest month for consumer spending since the slight decline in June 2010.

As usual, one month doesn’t tell us much about the trend and so we need to look at the annual pace for a clearer view of the big picture. But here too there’s reason for caution. As the chart below shows, the divergence between expenditures and income has been growing in recent months, with purchases continuing to move higher without a comparable rise in income. Something was bound to give way eventually. Either income would bounce back or consumption would fall. It appears that the rebalancing is unfolding via lower levels of consumer purchases.

Even so, it’s still debatable if the reluctance to spend last month was a one-time affair or the start of a sustained bout of higher saving. Given today’s numbers, lowering expectations is getting easier. “The quarter is going to be very slow,” Christopher Low, the chief economist at FTN Financial, tells Bloomberg. “The biggest explanation for that is gas prices, so obviously the fact that oil has fallen quite a bit in the last couple of weeks is a really good thing. Relief just in time.”
Only time will tell is lower energy prices will provide salvation. Meanwhile, keep an eye on gas prices. So far, so good. U.S. regular gasoline prices averaged $3.65 last week, down from $3.96 in early May, according to the U.S. Energy Information Administration. That’s a step in the right direction. Let’s see what the next several weeks bring.
The stakes are certainly high these days for the economic outlook. Comparing the annual pace for industrial production, private-sector wages and private nonfarm payrolls summarizes the key variables. The strong rebound in the trend for wages and industrial production (a proxy for broad economic activity) has been crucial for the revival in job growth. But the year-over-year change in industrial production and wage growth is stumbling these days. So far, there hasn’t been any material blowback on the annual pace of growth for nonfarm payrolls.

Let’s not forget, however, that the May jobs report was unusually weak. It’s still an open question if that was a one-time event or the start of something more ominous for the broad trend. For the moment, May’s sharp slowdown in job creation hasn’t affected the 12-month change in employment. That leaves us waiting for the next update on job creation: the July employment report, scheduled for release on July 8.
We’ll have quite a bit more clarity on how the economy’s faring once that we see the June data for the labor market. Indeed, this stat promises to be the single-most important release in recent memory. For now, our outlook is guarded. The economy still appears poised to muddle through this “soft patch.” Today’s numbers aren’t encouraging, but neither are they devastating. The next opportunity for reassessing this outlook arrives on July 8. Till then, we’re left wondering and waiting.