Today’s spending and income report for August is no silver bullet, but it suggests that the risks of recession and deflation have fallen for the immediate future. The economy, in other words, appears stronger than it appeared over the summer.
Disposable personal income (DPI) rose a healthy 0.5% in August vs. July, the U.S. Bureau of Economic Analysis reports. That’s the best gain since April, when the outlook for the economy, while still well short of stellar, was considerably brighter than it was in recent months. Meanwhile, personal consumption expenditures (PCE) gained 0.4% in August, matching July’s pace. That’s the highest since the 0.5% rise in March.
In short, spending and income have rebounded from the summer slowdown. The economy is still harassed with any number of challenges, but it’s quite a bit tougher to argue that deflation and recession are lurking around the corner after reading today’s numbers. Anything’s possible, of course, but the August updates aren’t indicating deterioration in consumer spending and income.
Skeptics will be quick to point out that monthly figures can be misleading and so we must also consider the broader trend. True, but there’s encouraging news here as well, albeit with a caveat. Let’s start by looking at the rolling 12-month percentage change in DPI and PCE, as shown in the first chart below.
Income remains in positive territory on a year-over-year basis (black line). In fact, the pace of increase for DPI has increased in recent months. But consumer spending has been slowing (red line). For August, PCE rose about 2.7% over the previous year. That’s near the lowest 12-month pace this year.
Slower consumer spending isn’t surprising. Household balance sheets are still loaded with debt and working through the red ink is going to take time and (presumably) higher levels of saving. We’re seeing some of that in various reports of late. The unknowns are whether the savings rate continues to rise and, if so, how much damage the trend inflicts on spending? That’s a topic that bears watching, and given the current climate there’s reason to be cautious. Nonetheless, for the moment, at least, the August numbers don’t suggest a dramatic slowdown. Will consumer spending growth remain sluggish? Or drop sharply in the months ahead? Stay tuned.
Meanwhile, let’s not forget that the pace of growth in spending and income of late, even assuming it holds steady, is well below the rate of increase posted in the years before the Great Recession. The economy has recovered, but the lingering effects of 2008 and 2009 are still with us.
Fortunately, there’s no sign that rate of growth in private sector wages is hurting. Yes, we’re still below the rates posted in 2005 and 2006, when the economy was firing on all cylinders. But it’s clear that there’s a rebound in progress in 2010. Indeed, private industry wage and salary disbursements advanced 0.5% last month, matching July’s pace. That’s near the strongest monthly rate in more than a year. And on an annual basis, private wage growth continues to inch higher. For the 12 months through August 2010, wages rose 2%, the best level since before the start of the Great Recession in 2007, as the second chart below shows.
Does all this tell us that all’s well? No, of course not. All the big challenges in the months and years ahead still await, starting with the problems associated with sluggish growth in the labor market. But the pressing issue of late has been worrying about a new recession. Today’s report on consumer spending and income offer reasons for raising optimism a notch or two for expecting that we’ll avoid that fate.
The acute risk, it seems, is falling. That’s good news, but don’t celebrate for too long. The chronic ills are still with us and they require attention.