Personal Incomes Still Under Pressure
On the way to work this morning my phone dings with a news alert that "Consumer Spending Jumps In July" as "consumer spending rebounded strongly in July to post the largest increase in five months on strong demand for motor vehicles, a government report showed on Monday, supporting views the economy was not falling back into recession."
That is a pretty bold statement to make on the back of a one month number considering that industrial production, retail sales and employment data have so far been consistent with contractionary trends.
The issue with most of the economic data, which is consumed by the media from one month to the next as if it is their last meal, is that it doesn't reveal much about the overall "trends" in the economy. The trend of the data is far more telling about what the future will most likely be. For example, personal income in July rose a moderately healthy 0.3 percent after rising 0.2 percent in June. Wages & salaries grew a little more robust 0.4 percent, following a bump up of 0.1 percent the month before. Sounds good right? The problem is that on a year over year basis both personal incomes as well as wages and salaries are declining as shown by the chart above.
While consumers may have bit off a bit more in the month of July buying a new car, due to heavy incentives by dealers and low financing rates, the real issue comes next month when we will most likely see these trends reverse as evidenced by the steep declines in the regional manufacturing indexes.
Furthermore, inflation is also starting to creep back into the picture as food and energy ate more heavily into the wages and salaries. While auto sales did make up a large chunk of the jump in the headline number higher prices of food and energy are also a culprit. With over 1/5th of wages and salaries consumed by food and energy, and as the cost of food and energy rise, it consumes more and more of the average "Americans" income which slows consumption in other areas of the economy. This is a critical factor that gets missed by simply reading headline numbers and not looking at trends. The impact of inflationary pressures on consumers is increasing either directly due to rising commodity costs OR as incomes decline.
This is why if we look at the level of personal consumption as a percentage of disposable personal income we find that in reality consumption has been steadily declining since its peak in 2009. Since 1980, as we have showed in previous missives on this issue, consumption has increased as a percentage of DPI due to the the substitution of leverage in the form of easy consumer credit and mortgage equity withdrawals to fund the shortfall in the average American's standard of living. This is fine until you no longer have access to easy credit.
Which brings us to savings. When there is less income coming into the household, but the costs of living are increasing, there are only two sources to turn to in order to fill the gap: credit or savings. As discussed, with credit tight there are few options available for the average family to make ends meet which means that they cannibalize the meager savings that were accumulated during the crisis. Personal savings, even when sitting in money markets, is the foundation for productive investment into the economy. With low personal savings rates this is one impediment to creating strong future economic growth and inhibits recovery. With personal savings rates once again on the decline from already low levels what happens to the economy when those savings are depleted without access to additional credit? Answer - it won't be good.