Reading (And Misreading) Real Consumer Spending In June

A number of pundits today were quick to declare that the business cycle had finally rolled over last month because consumer spending fell slightly in June, as noted in this morning’s update via the Bureau of Economic Analysis. One blogger insisted—insisted!—that the 0.1% decline last month in real (inflation-adjusted) personal consumption expenditures (PCE) was a clear and unambiguous death knell for U.S. economic growth. But in the rush to judgment, some analysts are overlooking a few things.

Let’s consider June’s -0.1% drop in real PCE in terms of history. Although no one at this stage will see last month’s retreat as encouraging, it’s premature to claim that it’s a smoking gun. Monthly declines are hardly unusual in periods of growth. Indeed, as the chart below reminds, looking at monthly changes in real (or nominal) PCE is only slightly more valuable than tossing a coin for insight about what happens next.

Ergo, there’s a reason why looking at year-over-year percentage changes are so valuable—essentially, really—for evaluating economic indicators: a lot of the short-term noise is stripped away. Let’s consider real PCE again in terms of its annual changes, as shown below. Note that the case for deep, dark pessimism looks a lot less compelling in the second chart. In fact, the 12-month change in real PCE actually ticked up last month, rising 2.0% vs. its year-earlier level—the best pace since last October.

Does the modest improvement in the annual change in real PCE mean that all’s well? No, of course not. But neither is it a sign that the cyclical jig was up in June.
Ah-ha, you say! One indicator alone, even on a rolling one-year basis, can be misleading. Agreed, which is why I routinely look at more than a dozen leading and coincident indicators for a diversified read on the otherwise unobservable variable known as the business cycle. On that note, my previous look at the June data a few weeks back suggested that recession risk was quite low. That’s not a forecast—rather, it’s merely a sober look at what just happened. Today’s real PCE data point, which is one of the inputs in my recession risk index, doesn’t change the analysis.
If you’re focused too closely on the trees, it’s hard to see the forest. Granted, if real PCE continues to slip each month for an extended period, it’s probably time to put a fork in the expansion. I don’t rule out that possibility, although the macro gods are reluctant to give me a heads up on, say, the August updates on jobs and spending. In other words, we’re at least several months away from making a call that it’s all over now.
Sure, you can make an argument that it’s time to expect nothing less than a collapse in consumer spending from here on out. But it’s hard to make a persuasive case for the dark outlook based solely on last month’s real PCE. In fact, most of the key indicators don’t yet add up to a recession call as of June. That’s a radical view by some accounts, but the numbers still look convincing for thinking that the cyclical isn’t yet toast.
The only thing worse than lowering a coffin into a grave is finding out the next morning that the cadaver hadn’t expired. We may be at the end of this rope, but for now it’s still early to be calling a mortician.