The smoking gun today is that while disposable personal income rose 0.2% in September, personal consumption spending dropped 0.3%. It’s not the first time that income rose and spending slipped in the same month, although it’s rare. Indeed, news of a spending decline generally is rare. Until now.
In the current climate, everyone will recognize that lower spending has legs, and that the trend will take a toll on an economy that relies so heavily on it for growth. Meanwhile, let’s not assume that income will keep rising in the coming months and quarters, which is far from certain. Yes, a new fiscal stimulus is reportedly coming, but the inclination will be strong to bank another round of checks from the government. No wonder that some policymakers are talking of FDR-type infrastructure projects to bypass consumers in a bid to boost demand in the economy. As for Joe Sixpack’s sentiment, much depends on how the labor market fares going forward, and for the moment that outlook isn’t encouraging.
On the spending side, last month’s drop is the biggest monthly decline in four years. What makes this news so discouraging is that it doesn’t yet reflect the deteriorating consumer sentiment for October or the ongoing economic and financial pain that we think is coming for the remainder of this year into 2009. It’s hard to imagine that spending reports in the coming months will somehow avoid further deterioration, and that news will weigh heavily on everything from the stock market to employment reports. More immediately, to state what now’s surely obvious: the holiday retail season looks set to disappoint.
As we said yesterday, the age of consumption is over, at least as we’ve known it in recent years and for the foreseeable future. Spending is out, saving is in, and the revival has only just begun. Yes, Virginia, cycles are still alive and kicking.