The Commerce Department announced today (March 1) that consumer spending rose by 0.5% in January.
But that personal income fell by 0.1%.
The report pretty much sums up everything that worries me about the economy.
It’s great news that consumer spending climbed in January for the fourth straight month. January’s 0.5% increase was ahead of the 0.4% growth that economists were expecting according to a Bloomberg survey. (Consumer spending accounts for 60% to 70% of U.S. economic activity.)
January’s number was an increase from the 0.3% revised growth reported for December. For the fourth quarter of 2009 as a whole, consumer spending grew at an annual 1.7% rate.
Where is this increased spending coming from?
Sure not from growing incomes. Personal income grew by just 0.1% in January after growing by 0.3% in December. Economists had expected as 0.4% increase in incomes.
Real disposable income, that’s income after subtracting taxes and correcting for inflation, actually dropped by 0.6% in January.
Right now it looks like the money for this growth in consumer spending is coming out of savings. The savings rate in January fell to 3.3%. That’s the lowest reading since October 2008. And it’s down from 4.2% in December.
I don’t think you can get long-term spending growth from that source. (The most recent credit card numbers show that consumers are still paying down debt.)
Which leaves the trend in consumer spending at the mercy of the unemployment rate. When that jobless number starts to fall and more people are back at work, consumers will have more personal income to spend and the improving economic picture will make them more likely to spend it.
That’s why the “when” of lower unemployment—and the experts have started to push the “when” off into 2011—is so important for the pace of the economic recovery as a whole.
LC,
I know this isn’t politically correct, but you gotta love the “borrower” complaining about staying in the house for free. Only in the new America!
As for the reasons lenders don’t foreclose, it’s simply better that someone takes care of the property AND we (I’m a lender) don’t start a cascade of neighborhood value declines. Especially when you can keep the value of the home on your books at the old, inflated value.
It’s a win/win! Assuming it can last or we can kick the can down the road like Japan has.
Well, I don’t know how typical I am (recently retired and still adjusting to lower cash flow — both in and out), but my spending since December was mostly once a year stuff. Car insurance, property taxes, oh and I bought a compressor from Northern Hydraulics that was closer to a theft than a purchase. Everything but the property taxes came out of ordinary income; the property taxes required withdrawal from a portfolio. Haven’t had to hit the IRAs yet. So, I, for one, am having to dip into “savings” for expectable yearly expenses. Over the next several months I expect the portfolios to soar (of course!), thus generating funds for these taxes next year.
Record reversals of: consumers paying mortgages or rents. Record levels of approval for previously denied disability claims and other government run assistance programs. Record number of location reductions to purchase goods. Record levels of deep discounting at retailers. Consumer concerns over changes to credit card policies and practices. All sound like a good reasons for slightly increased consumer spending.
My question then is where/how does the lender (Bank) record this kind of rent/mortgage free loans on their books?
Lcmandell,
I understand that it is not unique particularly in the “sand” states (CA, FL, AZ, NV) for families who are “under water” with their mortgage to be living rent free. I’ve had an attorney in FL that specializes in bankruptcies tell me that he was going to retire this past year but postponed it because he has enough business to keep him busy for the next few years. He counsels his clients to stay in the house, stop making the mortgage payment and use that money to pay off the credit cards. Once they get final foreclosure notice he files the banckrupcty and they get to stay in the house for another 9 to 12 months completely rent free.
MAWG63,
This was in the LA Times Sunday Business section: http://www.latimes.com/business/la-fi-squatters27-2010feb27,0,3096300.story
I was surprised to read THAT many homeowners are living rent/mortage free.
MAW,
For whatever it’s worth, I know 6 people that haven’t made a payment for over 2 years. All the houses are (were?) over a miillion in value in So Cal.
It’s interesting that people question the validity of the Gov numbers, especially as to my eye, they appear to be terrible. Why would people spending more than they make a good thing as a long term US stock investor? I’m gonna heed Jim’s 840 S and P advice from a while back…….
so no more Easter bunny bringing jobs?
When I go to the stores and local mall I still see plenty of people carrying shopping bags out to their cars. Not very many empty tables at the restaurants this past weekend either. People are spending. What I think a lot of people are not doing is paying their mortgage. I personally know of three households that have not made a mortgage payment in almost a year but continue to spend and pay their credit card bills. Their household income has not decreased to any significance but their home value has dropped by at least 25%. They have been told they can probably stay in the house for 18 months to 2 years before having to vacate so they have saved enough money for moving day and are enjoying life in the meantime. Like it or not – my sense is that there are more people living this way than we really know.
purewater is right.We are trying to figure out how to make up for a shortfall in our budget which is heavily dependent on a sales tax and Hotel tax. People are not spending like the goverment says.
georic, thanks for the info.
Purewater – you’re exactly right. State sales tax receipts provide the best measurement of consumer spending.
Perhaps I don’t need to say this but I think it is a big mistake to focus on many of these economic indicators in the short term. This is a very unusual economy and many of the traditional measures will be misleading, confusing, and contradictory. Just look at the magnitude of the backwards adjustments that have been made so far. Perhaps the best way to play this market is to come up with your own macro thesis and invest in companies that are strong within that thesis. When indicators come out that spook the market, pick up some of your shares more cheaply. I still think the real assets, lower US dollar play will work out well and Canada (14 GOLDS!!!) is an outstanding place to begin.
I have to agree with the report. I believe people are spending more. I was at our upscale mall in Nashville this past Saturday night, and it was quite packed; and yes, unlike me, ( I didn’t purchase a thing,) people were toting bags of freshly bought merchandise. Then later, we had to wait 35 minutes for a table at P F Chang’s. So the money is coming from somewhere. Maybe it’s their profits from currency trading.
twosocks, partial (1960 to 2008) answer at:
http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1820
roughly up from 62% to 70%.
Here’s a statistic I’d like to know:
How has consumer spending as a percentage of the economy changed since 1920?
To all,
Consumer spending accounting for 60-70% of the economy seeems to be one of the biggest problem with our economy. It seems that the only way to make the economy grow is to make people go spend money they probally dont have or shouldn’t. My question is if the government wasnt spending money the way it was would the economy still be in the negative? And if the economy was still in the negative would that be a bad thing or a good thing( because the gov. wasnt spending money it didnt have). It seems the enomy being positve helps the investor because the stock market goes back up but hurts everyone with the US debt going up.
Hi Jim,
You have always been saying the savings rate would dip hard as a result of th Great Recession, but it seems perhaps that may not be the case. At least the jury is out.
Yeah, unemployment will go down.. or more precisely, more people will fall off the radar and become part of the “shadow unemployed”. No growth or increase of consumer spending there.
market_dogma
Jim,
Purewater does make an excellent point. It should also be noted that the federal government has an ulterior motive in spewing positive statistics (hellooooo election year…).
The other explanation is that the Fed Government’s consumer spending report is wrong, like almost every other statistic they publish. All they do to compile this report is compare a small sample of same store sales (I think around 5,000 stores). So, they don’t factor in a)stores that have shut down due to bankruptcies or b)stores that have closed due to poor performance. Take Best Buy for example. Of course their same store sales have improved because Circuit City went bust. Moreover, they closed a bunch of their under-performing stores so those don’t get counted.
The only way you’ll know retail sales are improving is to look at states sales tax receipt. Almost every state showed a sales tax revenue decline in December. Moral of the story is take every gov’t statistic with a huge grain of salt.