November’s Weak Spending & Income Report Clouds Outlook

Disposable personal income (DPI) fell slightly last month while personal consumption spending for November rose by a mere 0.1%, the Bureau of Economic Analysis reports. It’s a disappointing report overall and one that adds up to the softest month for spending and income since August.

DPI dropped by a scant 0.04%, but it was the first monthly decline since the summer and it’s a reminder that the pace of income growth has yet to rebound to levels that prevailed before the summer slump. Consumer spending is doing better but it remains sluggish.

It’s not terribly surprising to find that the rate of consumption is slowing. As I’ve been discussing in recent months, spending has been growing at rates that are too lofty relative to income. As the second chart below shows, there’s been a substantial gap between the two when measured on a year-over-year basis. That’s unsustainable. Either spending is set to fall or income’s growth will rise.

Today’s numbers are hardly devastating, but the slowing pace of annual growth for income is particularly troubling… if it continues. Although DPI is still rising on an annual basis, the trend isn’t encouraging at the moment. The American economy relies heavily on consumer spending, which in turn draws hefty support from household income.
On the other hand, it’s premature to give up hope just yet. Private-sector wage growth looks much better when measured against year-ago levels. For the year through last month, private wages are higher by 4.1%, the best rate since April.

But trouble may be brewing here as well. Wages fell slightly last month vs. October, the first monthly retreat since August. The slight decline hasn’t shown up in the annual trend, but it will if wage growth continues to suffer.
The possibility for salvation resides primarily with the labor market. If the recent decline in initial jobless claims is a reliable leading indicator for thinking that job growth will pick up, the worst fears for income may be overblown. History tells us to think positively when jobless claims drop substantially, but only hard numbers for job growth will convince anyone at this late date in the cycle.
Meantime, today’s numbers have set up a challenge that can’t be ignored. “In the absence of a significant pickup in income, we won’t see a big boost in spending,” says BNP Paribas economist Yelena Shulyatyeva. “The momentum will slow in the fourth quarter, but the economy is still growing.”
Will the growth suffice? The jury’s still out, and today’s mixed report on durable goods orders for November doesn’t help clarify the outlook. Yes, new orders for manufactured goods rose by a healthy 3.8% last month, the Census Bureau reports–the most since July. The annual trend looks good too, with new orders jumping 12% vs. a year ago. But a big chunk of last month’s gain was powered by the volatile transportation sector. Take out that slice of business and new orders were virtually flat in November.
It’s hardly encouraging that new orders for capital goods (a subset of durable goods that’s considered a leading indicator because it’s a proxy for business investment) slipped more than 1% last month. Capital goods orders are still up by 6.5% on the year, but any setback raises fresh worries these days.
All the more now that the crowd’s wondering anew if Joe Sixpack is stressed. “The lack of real income growth really raises questions as to what is going to happen to the economy in the first quarter,” opines Mark Vitner, senior economist at Wells Fargo Securities.