INDICATOR: March Consumer Spending and Income
KEY DATA: Consumption: +0.2%; Disposable Income: +0.2%; Savings Rate: 2.7%
IN A NUTSHELL: "Sluggish wage and salary gains is leading to lower savings and that raises questions about the sustainability of consumer spending."
WHAT IT MEANS: We saw on Friday that consumption grew at a solid 3.2% pace during the first quarter of the year so the March increase in spending was not a surprise. However, the March numbers were not particularly strong as demand for both durables and nondurables fell. A rise in services demand, something I have been looking and hoping for, overcame those cut backs. What is of interest in this report is the income numbers. Disposable income, what we have left after the government gets its cut, rose decently but wage gains remain were not particularly great. As a consequence, the savings rate stayed low, a point I made in the GDP commentary. What helped greatly was the sharp drop in gasoline prices. That decline has continued into April but how much further it will fall and for how long is anyone’s guess. Indeed, if anyone knows how to forecast gasoline costs please tell me because I am largely clueless. What will happen to spending when prices start turning up again, which we know they will, is the real issue.
There may be a sign that the manufacturing sector, which had slowed, could be coming back a little. The Chicago Fed Midwest Manufacturing Index rose moderately in March after posting a strong gain in February.
MARKETS AND FED POLICY IMPLICATIONS: What drives my thinking on consumer spending is wages and salaries and while job growth is ramping up the overall increase, there is little gain coming from businesses paying their workers more. Very simply, they don’t have to so why should they? As long as the unemployment rate remains at an elevated level, workers will not see their pay increase very much and that creates the conundrum that I have been talking about for a very long time: In a consumption-based economy, growth comes from consumers buying more. But that means individual worker income has to grow solidly and with high unemployment rates, that is just not going to happen. So, growth remains sluggish, businesses don’t aggressively hire or give pay increases and the unemployment rate falls slowly. Until that trap is escaped, we will be stuck in this disappointing economic pattern.