Personal Incomes Still Feeding The Gas Tank
From the release today: "Consumer spending increased by 0.4% mom in nominal terms, and 0.1% after adjusting for
inflation. Although the April result for real spending was a bit better than anticipated--we had forecast an unchanged reading--consumer spending growth for Q2 is tracking below our expectations. Nominal personal increase increased by 0.4% mom, but real disposable income was flat. Real disposable income growth--an important consumer spending fundamental--is basically unchanged year-to-date. Note that both income and spending were revised down, as revealed in yesterday's Q1 GDP revision."
Therein lies the real story - income that is derived from two sources, wages and government transfers was flat year to date but consumer spending was increasing. Why? Because most Americans have to drive to work to earn the wages to buy the groceries for the family. It is a vicious circle.
If you look at the chart you can see that one of the reasons that personal incomes have flattened out over the last few months is that more and more people are falling off the government handout wagon of unemployment benefits. Now they are just unemployed and broke. Transfer receipts as a percent of income has declined during that period of time. One could say that is because wages have risen. One would be wrong - the chart also shows that taxes as a percent of income has risen - this even on the back of the Obama/Bush tax breaks at the end of the 2010. Taxes are rising as a percent of income as wages have declined due to the fact that there is a massive pool of available labor suppressing wages(say hello to a very dangerous form of deflation).
Which leads us to the decline in the personal savings rate. In our recent commentary on a structurally manageable debt levels - high levels of savings are required to support strong, organic economic growth through productive investment.
With the personal saving rate declining as consumers have to dip into savings to make ends meet, remember income is stagnant as food and gas increase, this makes it much harder to have disposable income with which to make productive investments with.
With GDP coming in weaker than expected in the last revision it is very likely that the current decline in personal savings will also be a negative factor in the next couple of quarters of economic growth reports as a slowing down of consumption and investment eats away at the bottom line.