This morning’s update on personal spending and income for April raises as many questions as it answers.
First the good news. Disposable personal income rose strongly last month, posting a 0.5% gain in April, the fastest pace since last December. The rise was equal in real as well as nominal terms. A healthy rise in wages was a critical factor, courtesy of expanding payrolls in April. But if you thought that a strong month of income growth would juice spending, last month’s numbers were a disappointment.
Income jumped in April, but spending was virtually unchanged, in nominal and real terms. That’s a sharp drop from the trend of late, when higher consumption has been the monthly story. Since October, personal consumption expenditures have risen every month in nominal terms at a monthly average of roughly 0.5%. Last month, however, the spending all but dried up. Yes, consumers spent more in services, albeit mildly, while purchases of goods (the cyclical sensitive portion of consumption) retreated by a substantial 0.4% in April.
Is this a sign that consumers are beginning to save more by delaying if not forgoing unecessary spending? Probably. Is it a trend with legs? If so, does it imperil the prospects for the economic recovery? A single month’s numbers are hardly a trend, and so we should be careful in reading too much into April’s report. Another reason for reserving judgment comes by looking at the recent history in the various components of personal consumption expenditures. For starters, upward momentum looks healthy, as the chart below shows. Also, keep in mind that nondurable goods spending–the biggest loser last month–looked ripe for a slowdown, given its leadership in recent history.
Yet spending ultimately requires income, and so one must be considered in context with the other. That inspires looking at the broader trend for this pair over time. Consider the chart below, which shows the rolling 12-month percentage change in spending and disposable income in nominal terms. The pace of spending (red line) has obviously rebounded sharply over the past year. So too has income (black line), although the trend hit a patch of turbulence in April.
It’s premature to say that the rebound in disposable income—a critical factor for expecting the nascent economic recovery to roll on—is in trouble. But the downshift in the income trend in the chart above merits watching. If nothing else, it serves as a reminder that it’s still all about jobs. Private-sector wages represent roughly half of personal disposable income. Only a rebound in the labor market can keep income levels rising, which is turn is necessary to keep consumption bubbling–the primary driver of GDP.
“The recovery has been impressive, but there are significant headwinds facing it,” Adrian Cronje, chief financial officer of investment firm Balentine, tells CNNMoney.com. “And in the last few weeks and months, there’s been a lot that’s caused people to sit back and take a breath.”
Nigel Gault, chief U.S. economist at IHS Global Insight, advises via Bloomberg BusinessWeek: “The consumer is going along for the ride but isn’t really leading the recovery.” On the other hand, “because employment is growing, we’re starting to create some labor income and that is positive for future consumer spending.”
The transition from the deepest recession since the 1930s to economic recovery was always destined to face bumps and setbacks, raising questions anew about the strength and durability of the rebound. Today’s numbers are merely a preview of things to come. The Great Recession is over, and the Great Transition is here. In theory, distinguishing between the two is a piece of cake. In practice, reading the tea leaves is going to get complicated at times.