Tags: Incomes | consumer | spending | economy

Incomes Are Growing, but Consumers Aren’t Spending Extra Cash

Tuesday, 31 July 2012 10:39 AM

INDICATOR: June Income and Spending

KEY DATA: Consumption: 0 percent; Inflation Adjusted: Down 0.1 percent; Personal Income: Up 0.5 percent; Inflation Adjusted Disposable Income: Up 0.3 percent

IN A NUTSHELL: “The good news is that incomes are starting to grow faster but unfortunately it is not being spent.”

WHAT IT MEANS: With the release of the second-quarter GDP report, we know a lot about what happened to consumption in the spring. It was not great.

The June numbers indicated that the spending slowdown continued unabated until the end of the quarter. Consumption was flat and when you adjust for inflation, it declined slightly. Durable-goods purchases were the reason as spending on nondurables and services rose. We will see if that continued when we get the July vehicle-sales numbers Wednesday. But that softness is nothing new.

The real story is the income numbers. Personal income rose solidly, something we have seen for all of this year. Even adjusting for inflation and taxes, people had more money in their pockets. The most encouraging part of this was a rebound in wages and salaries. With the government cutting back on payrolls and businesses barely hiring while holding workers' compensation stable, this segment of income had tanked in April and May.

Since income was up but spending was not, the savings rate rose to its highest level in a year.

MARKETS AND FED POLICY IMPLICATIONS: This report didn’t tell us anything about spending but the rise in wage and salary income is an important development, as long as it continues.

We are a consumption-driven economy and spending has to improve for growth to accelerate. But the only way we are going to get an extended period of stronger spending is if wages and salaries grow fast enough to support addition purchases. This is something I have been harping on for a long, long time now.

While an individual business may improve its financial condition by limiting wage gains or even by cutting pay and workers, if all firms do that, the resulting income growth will not be strong enough to support an expanding economy.

If businesses are indeed beginning to pay a little more, that will provide the fuel for future consumption. Whether people open their wallets is another question as confidence is so low. With the Federal Reserve starting a two-day meeting and with the Europeans meeting to determine what actions the Central Bank will take to insure that the euro is preserved, this release will be a twig falling off a tree in a huge forest.

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Tuesday, 31 July 2012 10:39 AM
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