October Income and Spending

Personal income and consumer spending was disappointing in October according to the latest data provided by the Bureau of Economic Analysis.  Both measures of the economy were lower than the previous month, and even with adjustments made for the terrible hurricane hitting the densely populated east coast at the end of October, the tally was less than what the Bloomberg consensus was anticipating.

Consumers rule our economy, and no indicator does a better job of monitoring the strength of their consumption than the outlays component of this report.  Just like the retail sales indicator that we wrote about a few weeks ago, it appears super storm Sandy slowed spending by consumers.  When adjusted for inflation, consumption fell 0.3 percent for the month; the year-over-year change deteriorated as well, moving to 1.3 percent from 1.9 percent in September.  The best 12-month improvement since the end of the great recession occurred in November 2010 with a 3.2 percent gain.  The improvements have now been trending lower for nearly two years.

Growing income helps facilitate higher levels of consumption.  Unfortunately the primary measure of income fell for the month.  Real disposable personal income measures the amount of money a consumer can spend after taxes and inflation.  It ticked down 0.1 percent.  The savings rate improved to 3.4 percent compared with 3.3 percent in September; the added saving also hurts consumption.

Inflation remains tame according to the Federal Reserve’s favorite measure of price changes.  The core (it excludes food and energy) personal consumption expenditure price index increased by 0.1 percent after September’s revised increase of 0.3 percent. Over the last year, this measure of inflation has grown by 1.6 percent.  This is well below the 20 year average of 1.9 percent.

The level of consumption only reiterates the challenging economy America is experiencing.  If consumer growth is rising at less than 2 percent a year, the smaller areas of the economy (business investment, government outlays, or net-exports) will need to grow faster in order to keep the expansion increasing.  Businesses seem hesitant to part with cash, our nation’s fiscal position makes it unlikely that government spending will add a significant amount to output, and many of our trading partners are experiencing their own difficulties, so exports are probably not going to save the day.  If the economy is going to materially improve, consumers will need to spend.     (by C. Cox)