INDICATOR: August Consumption and Personal Income
KEY DATA: Consumption: +0.3%; Disposable Income: +0.5%; Savings Rate: 4.6%
IN A NUTSHELL: "Household incomes grew a bit better but people are still spending cautiously."
WHAT IT MEANS: Could it really be that households have learned that they need to watch their budgets? Personal income rose solidly in August helped along by a rebound in wage and salary gains. In July, worker compensation was actually down, which obviously wasn't what anyone wanted. It is hard to spend when your income is falling. That changed in August and consumption did improve, especially for services. This component, which is two-thirds of spending and 45% of the economy, has been weak. Why there was a sudden surge in services demand is unclear, especially since August temperatures were actually lower than normal in large parts of the country and utilities are part of services. Regardless of the reasons, I will take it as it means that demand is improving. Still, when inflation is factored in, consumption is growing at maybe a 1.5% pace in the third quarter and that is not very good. Part of the reason we are not seeing strong consumer spending, other than the fact that wage gains are so tepid, is that the savings rate is remaining at a decent level. This year it is hanging in at about 4.5%. That is a somewhat lower than the 5.6% pace average during the previously three years but well above the 3% level posted during the go-go, bubble-driven 2005-2007 time frame. We want to shop but not if it breaks the bank.
MARKETS AND FED POLICY IMPLICATIONS: It is critical that wage and salary gains accelerate. They have been pathetic and as a consequence, retailers are worried. The outlook for the holiday shopping season is cautious at best. But don't expect firms to suddenly become altruistic and start raising wages. As long as there are large numbers of applicants for each job, there is no reason to bid up wages. While some at the Fed fear wage inflation, until we get some better increases, this disappointing recovery will continue to disappoint. What the economics profession should be discussing but it is not, is why falling/stagnant real wages are not clearing the market faster. Interestingly, if the issue is a lack of wage gains is correct, when compensation increases accelerate, job growth will likely improve as well and the unemployment rate will fall faster. Hmm. Rising real wages and faster job growth. How do we rationalize that? Just wondering. Actually, I am poking fun at some at the Fed who hold to their traditional economic models and who are arguing that if we don't start tapering soon, the sky will fall. If the sky falls it will be due to a miscalculation in Washington that the other party will blink. If someone doesn't act like an adult - and there doesn't seem to be a whole lot of those in Congress - an extended government shut down or much worse, the failure to raise the debt ceiling, could unwind all the progress that has been made. Unless you are willing to accept a government shut down or a default, you shouldn't threaten it because you just may have to back up your words with action. Right now, investors are only modestly hedging their bets and the declines in the markets are not yet steep. That could change, though I too don't think there are enough crazies in Washington to allow an extended shut down or default to happen. At least I hope that is the case.