Consumers Fail as Questions Remain for Drivers of Economic Growth
By Rom Badilla, CFA
October 1, 2012
Economic growth appears uncertain as income growth for the U.S. remains weak leading to individuals dipping into savings. The U.S. Department of Commerce released a report showing that Personal Income for August increased by just 0.1%. In addition, Personal Income was revised lower in July from an initial report of 0.3% to a final gain of 0.1%. The slight gain in the latest month’s release disappointed markets since it was below the consensus of forecasts which called for a gain of 0.2%.
When we account for inflation in order to determine if income gains keep pace with the change in prices of goods and services, income growth looks bleak. Real Personal Income which is adjusted for inflation declined by 0.3% in August in contrast to a gain of 0.1% in the prior month.
Despite the lackluster growth in Personal Income which translates to thinner wallets, the dollar amounts of consumer spending accelerated but mostly due to higher prices as opposed to increases in demand. For August, Personal Spending increased by 0.5% which is a faster pace from the previous month of 0.4%. The August print which was in-line with consensus forecasts was mostly driven by increases in prices. Real Personal Spending which is stripped of the changes in prices gained only 0.1% in August versus an increase of 0.4% previously.
Price pressures remain for consumers as evident by the latest round of August data. The price index aka Personal Consumption Expenditures (PCE) Deflator increased by 0.4% after coming in flat in July. Prices excluding the food and energy aka “Core PCE” matched last month’s gain by coming in at 0.1% in August. This number is important since food and energy can be volatile in nature and can distort the overall trend of inflation pressures.
Between the weak improvement in income growth and the rise in prices of goods and services, consumers had to dig into savings to maintain their spending. This is evident by the drop in the Savings Rate. Savings as a percent of Disposable Income fell from 4.1% in the prior month to 3.7% in August.
When we breakdown the components of economic growth and consider the recent string of disappointing data, there is less reason to be optimistic. As we covered earlier, business investment appears to be slowing down. In addition, the fall in government expenditures as politicians deal with the impending Fiscal Cliff is a drag as well as declining exports amid slowing growth around the globe.
This leaves the focus on consumers which comprises near seventy percent of U.S. economic growth. Given today’s data, it appears that the consumer isn’t going to lead this economy toward robust growth as it did before the Great Recession, anytime soon. While housing which has led to gains in consumer spending in the past, is on the road to recovery, questions remain of its sustainability amid high unemployment. Hence, a muddle through economy of lackluster growth should continue with risks toward the downside. This in turn should keep bond yields fairly low for the foreseeable future.
According to Trade Monster’s Bond Trading Center, U.S. Treasuries are rallying slightly with interest rates falling. The yield on the current 10-Year U.S. Treasury is lower by a basis points to 1.64%.
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