Today’s update on consumer spending and income confirms what was already clear in Friday’s Q1 GDP report: the economy is rebounding. It’s debatable if the rebound has the wherewithal to roll on at a pace that’s sufficient to keep the economic engine humming. But for the moment, the numbers speak loud and clear.
Disposable personal income (DPI) rose 0.3% in March, the Bureau of Economic Analysis reported this morning. That’s up from February’s flat performance and is the best monthly gain since last December. DPI is up 3.4% for the past 12 months. Spending fared even better. Personal consumption expenditures (PCE) jumped 0.6% in March, at the top of the trend in recent months and raising PCE by 4.5% over the year-earlier level.
In short, the snapback in spending and income was alive and well in March. As our chart below of rolling 12-month percentage changes in DPI and PCE illustrate, the trend has been friendly of late. Short of an outright meltdown in the economy, the rebound was all but destined to arrive. After the extraordinary dive in consumer spending in 2008, it was virtually assured that some degree of climbing out of the hole was highly likely. After delaying purchases for months, the natural forces of cyclical recovery were augmented with monetary and fiscal stimulus. We’re now seeing the fruits of the resulting recovery.
Deciding what comes next is less clear. The good news is that short of a new shock to the economy, the mending will likely continue. Confidence is returning and interest rates remain low. Meanwhile, government stimulus is still coursing through the economy in various forms. But there are a number of headwinds in the future that raise questions about how strong the recovery will be in the months and quarters ahead. As stimulus fades and interest rates rise, spending by businesses and consumers must pick up the slack.
On that note, it’s unclear if Joe Sixpack’s recent revival to form in spending is temporary or something more. One reason for staying cautious comes from looking at our second chart, which compares spending and income since the Great Recession’s official start in December 2007. Indexing this pair shows that income, which has received a relatively large degree of government support in the past two years, is rising well above the increase in spending.
The gap in income growth over spending growth is closing, however. Will it continue to close? Or will a new-found propensity to save keep a lid on spending growth? No one knows, of course. One of the critical variables in determining the answer will come from the labor market. On that front too there’s much speculation. The next data point arrives on Friday, when the April report on nonfarm payrolls is released.
Payrolls in March rose by 162,000, the best month since the recession began but still well below what’s needed to make headway in recovering the 8-million-plus jobs lost in the downturn. But more important than absolute levels at this point is the need for continuity in the economy’s ability to create jobs on a net basis.
By that standard, the crowd is hopeful that Friday will dispense another favorable report. The consensus forecast for nonfarm payrolls calls for a rise of 187,000 for April, according to Briefing.com. That’s slightly better than March’s gain, but still well below what’s needed.
The trend overall is favorable these days, but the details are starting to matter too. One of those details is the trend in wages. While income (DPI) and spending (PCE) are higher over the past year by 3.4% and 4.5%, respectively, private sector wages are up by a relatively light 0.8%. One more reason that the stakes are high for Friday’s job report (and the ones that follow). Spending, after all, has to be financed, and government largess has its limits these days of red ink.