Personal consumption expenditures rose by 0.25% last month, which looks encouraging on the surface, in part because it’s the third straight month of gains, albeit modest gains. The superficial message appears to be that the consumer is repairing his capacity and willingness to spend.But this is premature.
The government’s stimulus efforts remain a key source of support for consumer spending, most notably through the so-called cash-for-clunkers program, i.e., government-subsidized auto purchases. But as one economist tells Bloomberg News today, “The cash-for-clunkers program helped auto sales but hurt other sales, which shows consumption remains weak. Consumers don’t want to spend on other things and cannot spend, to some extent, because income growth is still anemic,” opines Christopher Low, chief economist at FTN Financial.

Meanwhile, disposable personal income continues to sink, albeit just modestly in July vs. a 1.1% loss in June. “The fiscal stimulus that boosted disposable incomes in the spring is now fading,” advises Paul Dales, an economist at Capital Economics, in a report to clients via the Christian Science Monitor. “Excluding the fiscal stimulus, incomes have been trending lower for the last seven months.”
Reversing the trend will ultimately require a rebound in the labor market. So far, the best one can say on this front is that job losses are slowing. That’s encouraging, but only relative to the recent past, when job destruction was accelerating.
There’s nothing in today’s update on personal income and spending that changes our fundamental view that the “technical” end of the recession is here or imminent but that it will be followed by a long period of negligible growth.
Learning to live with anemic growth is the new new challenge, and the learning curve has only just begun.