On the surface, consumer spending appears to be holding up, and surprisingly well, considering the barrage of discouraging economic and financial trends harassing the waking hours of our hero, Joe Sixpack, of late.
This morning’s update on personal income and spending in January reveals that personal consumption expendtires rose 0.4% last month, up slightly from December’s 0.3%. That’s about average if we look at the past two years of monthly PCE spending patterns. If we leave it there, we can say that Joe’s spending habits haven’t changed much, at least in nominal terms. Extending the thought, perhaps worries of recession are excessive. Consumer spending, after all, represents 70% or so of GDP; if Joe’s still pulling out his wallet as always, the odds of a deep and/or lasting economic stumble may be overbaked.
But as regular readers of this site are all too aware, we’re never willing to “leave it there.” Obsessed with the idea that there may be a more granular truth lurking in the numbers, we push on, wondering if we’ve missed something in the 30,000-foot survey.
On that note, let’s dive a bit deeper into today’s spending update by noting that the 0.4% rise in PCE last month all but evaporates when we adjust for inflation. Real PCE spending was unchanged (based on rounding to one decimal point) in January. In fact, that’s the second month running that real PCE was flat, and it was the third instance in the last four months. Stepping back and looking at the broader trend in real personal consumption spending only reaffirms the message in the last few months, namely, a slowdown in Joe’s willingness and/or ability to spend after stripping out inflation, as our chart below illustrates.
If the trend raises questions about the future, breaking out real spending by the major categories provides even more incentive for staying cautious on the question of, What’s next? Durable goods spending last month fell by 1.3% last month from December, measured in real terms at a seasonably adjusted rate–the fourth monthly decline in a row. Nondurable goods spending slipped too, albeit at a comparatively modest -0.2%. Only services-related spending managed to rise in real terms last month, advancing by 0.4%.
The implication: consumer spending, after cutting away the distorting cloud of inflation, is generally falling, and arguably looks set for more of the same in the foreseeable future. The hope is that the Fed and Congress can arrest the trend via rate cuts and fiscal stimulus, respectively. Perhaps, although there’s a cost to everything, starting with the risk of trading a cyclical downturn for higher inflation. In addition, there’s the added worry that even if Washington is able to engineer a bounce in consumer spending, the effect will be temporary and so a “W” recovery may be coming. That is, we’ll see a modest bounce down the road, but it’ll give way to another dip before the real upturn takes root.
This is all speculation, of course, and so this essay may end up being one more hockey puck added the junk yard of discredited analytics. So it goes in attempting the impossible: forecasting tomorrow with yesterday’s data. To which the only antidote is watching, waiting and looking at the new numbers as they come in, which is the worst possible solution except when compared to the alternatives (our apologies to Churchill). Stay tuned.


  1. abc

    This is all a very blurry topic.
    1) In percentage terms of available credit + salary, Joe Sixpack is probably spending more than ever.
    2 )If we used a real time / forward looking inflation index composed of DJP, VTI, BWX, and Case-Shillers, the “real” consumption had probably been negative at least a year or two ago. It could possibly go all the way back to 2001.

  2. JP

    Perhaps, but that’s your guess, and one that’d be more persuasive with some numbers to back up the claim. (Hint, hint to any economists out there with some free time on their hands.) In the meantime, there’s the government’s PCE numbers. No doubt they’re flawed, but for the moment that’s all we have; hopefully, that’s better than nothing.

  3. Alex

    “The hope is that the Fed and Congress can arrest the trend via rate cuts and fiscal stimulus, respectively.”
    Why is that necessarily what we “hope” for? Maybe we should hope that consumers actually spend less than they earn, and that we have a recession to clear asset prices?
    It seems that everyone takes accelerating consumer spending as the only thing of importance, which I see as sub-text for “no recession ever…no matter the cost to avoid.”
    I guess I have a huge problem with that, as it just strikes me as a version of closet government economic planning.
    But what is your view? Do you believe that we must hope to avoid a decline in consumer spending at literally all costs? Have consumers been spending in an overall moderate fashion in the last few years? If not, maybe they should spend less? At what point do you believe we should accept a downturn in spending as natural, and just leave the d*** thing alone?

  4. Alex

    I was surprised to see my comment early yesterday went un-posted, which of course means you did not answer my questions.
    Then I looked over many of your posts, and realize that comments to your posts are the exception, not the rule. Most of the posts are basically useless, simply extrapolating on what you already said.
    This causes me to conclude that 1) your blog is highly unpopular, and not of much interest to anyone. or 2) you lack the courage or the intellectual character to post views that just MIGHT be in disagreement with yours, or in any other way bother you.
    I think its probably #2.
    Not need to respond, your silence tells me all I need to know about you as a person. Please don’t deign to converse on your views! You might end up being wrong, and I am sure you could not stand the strain of that revelation.

  5. Alesa

    Can you really justify why consumers are not spending nowaday.
    I as a consumer spending my paycheck money in safeway, albertsons, costco etc+ paying my mortgages as well and all these companies are just taking the money and send the jobs to India or China. And in return as a consumer what we get here is loosing my paycheck by spending more in these retail chains.
    When they outsource jobs people in US are loosing jobs and their paycheck stops and they are becoming more careful in spending. So the economy cannot complain about consumer sepnding at all. When we had our regular paycheck we spend enough. All these companies think twice before they send the job out of united states.
    Hope you got an idea what I was trying to say. unless this message goes out
    Hope you will write about it.,

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