Consumer Spending Points To Weaker Employment
The recent release of the Personal Income and Expenditure data by the BEA provided information onthe current status of the 71% of the economy that is made up by the consumer. The bright spots were increases in Personal Income rising 0.5% following an advance of 0.3 percent in the prior month with the wages & salaries component rising 0.5% after a 0.1% increase previously. Personal spending, however, remained stagnant and personal saving rates rose from 3.6% in the first quarter to 4.0% in the second. While increases in the saving rate are good for economic growth in the long term, as savings lead to productive investment, in the short term it is a detraction from economic growth signaling weakness in the economy.
In June "Real" Personal Incomes rose by .04% in June as inflationary pressures fell. However, with the recent drought putting pressure on grain production the decline in grains will impact meat production as well leading to higher prices. The two most expensive items in any shopper's grocery basket are meat and wheat. As prices increase due to near term shortages - the cost of the average shopping basket will rise commensurately. Furthermore, the increases in July in natural gas, oil and gasoline will increase utility, gasoline and non-durable good costs.
Since the average consumer lives on a finite amount of income - subsequent increases in food, utilities, gasoline and non-durable goods immediately affect families' spending patterns. For these reasons the recent upticks in disposable personal incomes are likely to be short lived as headline inflationary pressures increase.
Wages and Salaries, as stated above, did rise modestly in the current report which is a good sign. However, with recent employment reports showing weakness, aggregate end demand stagnant and cost pressures increasing the recent bump in wages could be somewhat transitory.
Government transfers rose by $3 billion in the most recent report and comprise a whopping 17.3% of personal incomes. This number does not include those roughly 45 million Americans living on food stamps. Not surprisingly the main increase in Government transfers came from increase in Social Security and Disability payments with this component surging by $7.8 billion in the most recent period while unemployment payments fell by $4.7 billion. The decreases in unemployment payments in the most recent month reflect the number of individuals falling off the roles entirely as employment rose during the same reporting period by 84,000 as disability claims rose by 85,000. See the problem here?
While incomes did tick up it should be realized that the annual rate of income growth has fallen sharply from the post recessionary peaks and inflation adjusted incomes have not reached a post recessionary high as of yet. The pressure on the consumer from stagnant wage growth in recent years to keep up with their personal standard of living has been difficult. As a result consumption has been constrained with drains on personal saving rates and increases in consumer credit.
As we stated above personal saving rates jumped from 3.6% in the first quarter of 2012 to 4% in the second. In the long term increases in personal savings rates are a healthy thing for the economy. Higher personal savings rates lead to more money in bank savings which in turn is lent to businesses which make productive investments. However, in the short term, increases in personal saving rates are a detraction from personal consumption. In an economy that is almost 71% composed of personal consumption this does not bode well for stronger economic number soon.
Furthermore, this will also impact future employment numbers. Consumer demand is the driver behind more hiring. As demand increases beyond the current capacity to produce businesses hire to meet demand. When end demand falls, as witnessed by declines in new orders and backlogs in recent manufacturing reports, the need to increase employment stalls and risks to layoffs increase. In the most recent NFIB reports "poor sales" has ranked among the top concerns for businesses which is why employment increases have remained weak outside of temporary hires.
The importance of today's Personal Income and Spending report was quickly glossed over by the media. The annualized growth in Personal Consumption declined from 4.48% in the first quarter of 2012 to 3.58% in the second quarter which follows the decline in annualized growth in wages. The slowing in annualized growth rates of wages and consumption is reflective of the decreases in credit availability to the consumer. The consumer is in the midst of a massive deleveraging cycle as shown by the debt to consumption ratio which as fallen from 250% to 210%.
With decreases in credit availability and stagnation in wages it is not surprising the consumers are slowing their consumption. However, for those expecting a pick up in economic growth, history shows that when both personal consumption expenditures and wages turn down on an annualized basis so does GDP. This does not mean that the economy is headed into recession immediately but it does mean that a weaker economy is likely over the next couple of quarters.
With consumer spending constrained, and input costs rising, the slow down in revenue growth for companies is likely to remain under pressure leading to a continued culture of cost cutting and minimum employment. This, of course, leads to a negative feedback loop onto the consumer who contracts due to worries about future employment and stress in maintaining the current standard of living. This is a very difficult psychological cycle to break.