The Slow Grind

The recent downshift in economic activity is grinding down consumer spending and income, according to this morning’s update from the Bureau of Economic Analysis. Disposable personal income slipped marginally in August vs. the previous month—the first decline in 11 months. After adjusting for inflation, however, DPI was down a considerable 0.3%, the second real monthly drop in a row. Personal consumption expenditures fared better, rising 0.2% in nominal terms, but that was a sharply slower rate from the July bounce and on an inflation-adjusted basis PCE was flat last month.

“What you’re basically getting is a scene where consumers are losing momentum, they’re losing momentum on income and as a result of that they’re slowing down on spending,” explains Steven Ricchiuto, U.S. chief economist at Mizuho Securities.
For a clearer perspective of what’s going on, let’s switch to rolling one-year percentage changes. As the chart below shows, the falling trend in DPI is now conspicuous. Disposable personal income was higher by 3.2% for the year through August, but that’s the slowest pace in more than a year. Personal income is doing better, advancing 4.7% in August vs. a year earlier. But unless income growth is poised to grow sharply in the months ahead, spending is set to trend lower.

One way or another, the relatively wide gap between spending and income on a 12-month basis will narrow. Unfortunately, it’s not hard to imagine that it’ll narrow through lesser consumption rather than higher incomes. What can arrest this decline? Job growth, of course. Unfortunately, recent reports don’t look kindly on expecting good news. True, yesterday’s drop in initial jobless claims offers a fresh round of hope. But after August’s flat performance, there’s little confidence that salvation is near for the labor market.
“Without payrolls picking up, you’re not going to get any boost in economic activity,” says Rudy Narvas, an economist at Societe Generale. “People are very worried about the economy.”