Consumer spending continues OK, while income continues its seemingly relentless decline

Consumer spending continues OK, while income continues its seemingly relentless decline

Nominally personal income rose 0.5%, and spending rose 0.2% in February. That’s the good news. 

The bad news is the personal consumption deflator, i.e., the relevant measure of inflation, rose 0.6%, so real income declined -01%, and real personal spending declined -0.4%.

While both real income and spending are well above their pre-pandemic levels, I have stopped comparing them with that, but instead with their level after last winter’s round of stimulus. Accordingly, the below graph is normed to 100 as of May 2021: 

Since then spending is up 2.3%, while income has declined -1.4%.

Comparing real personal consumption expenditures with real retail sales for February (essentially, both sides of the consumption coin) reveals small declines in each:

Meanwhile, the personal saving rate increased 0.2% to 6.3% in February. The below graph of the last 30 years subtracts 6.3% from all months so that the current reading is shown as 0 (before then all values were higher than 6.3%): 

Note that the savings rate has tended to decrease as expansions grow longer, leaving consumers more vulnerable to shocks (e.g., vehicle and gas prices). The current value is the lowest since 2013 (when a different stimulus program ended). In other words, so far consumers are making up shortfalls by digging into savings or tapping a source of credit.

One of my recession models – the “consumer nowcast” – is based on such a shock that is unable to be made up from increased real income, or an increased source of wealth to be cashed in. Income has clearly faltered, and stocks have not made a new high in almost three months. That leaves housing equity. Whenever the housing price spiral ends, unless something reverses, consumers are in trouble.