MARCH 30, 2012
By Natalia V. Osipova
Two months of solid consumer spending shows the U.S. recovery is gathering momentum. But it’s not yet time to celebrate. The disposable income of Americans in real terms was shrinking over the same period. So was the personal saving rate. The burgeoning gap gives an alert.
Growing at the fastest rate in seven months, personal consumption gained a larger-than-expected 0.8 percent in February, and the figure for January spending was revised upward, to 0.4 from 0.2 percent, the Bureau of Economic Analysis reports.
It would have been good news for the economy, if gains in personal income and saving rate were as swift as spending growth.
Personal income in February grew disproportionally slowly, 0.2 percent. And the saving rate, a leading indicator for the economy, fell for the second consecutive month, to 3.7, the lowest reading since August 2009.
In real terms, the numbers were even gloomier. Adjusted for inflation, personal consumption rose just 0.5 percent, and real income dropped 0.1 percent.
Rising energy and gasoline prices remain the biggest stress-factors. Yet, they don’t stop Americans from buying cars. Auto-sales, increased 3.2 percents, took the lion share of spending. Guy Lebas, chief fixed income strategist at Janney Capital Markets, said it should take about three months until consumers react on surging gasoline prices.
Other major gains came from spending on clothing and shoes, up 2.1 percent, and on recreational goods and services, up 1.1 percent.
The increasing gap between brisk spending and lackluster income most likely means spending outrunning income won’t be sustainable.
The February income numbers may be revised higher.
“Income numbers are missing something,” suggested Mark Vitner, senior economist at Wells Fargo Securities, pointing out several upward revisions in recent months.
One reason not to worry about the current discrepancy is the fast pace of hiring, said Michael Feroli, chief U.S. Economist at JPMorgan. Strong job growth for the past three months is making Americans willing to spend.
“Under current condition consumers can easily sustain the current pace of the spending gains,” said Feroli.
Some economists, however, disagree.
“We don’t want to turn back to purchasing everything on credit,” said Ken Kim, economist at Stone & McCarthy Research Associates. “Without income growth you can’t sustain spending. It’s done by credit, going back to old bad habits.”
In stepped-up spending on both durable and non-durable goods, as well as on services some economists see consumer willingness to take on more debt. Consumer borrowing in the three months to January remained the highest in a decade.
The current imbalance between spending and income would add to the “unsustainable deficits” the American economy is running, said Ken Mayland, president of ClearView Economics, a firm specializing in economic research and forecasting.
“This arithmetic is not working,” concluded Mayland. “Wage growth – that’s a missing ingredient. That’s a secret sauce.”