April 1, 2015
By Marguerite Ward
A steady rise in personal income and an uptick in consumer spending suggest that slowly, but surely, the consumer will soon emerge from winter hibernation.
Personal income in Feb. increased $58.6 billion, or 0.4 percent, outpacing the Jan. growth rate of 0.3 percent.
Disposable personal income increased $54.2 billion, or 0.4 percent in Feb., maintaining Jan.’s growth rate, according to the Bureau of Economic Analysis(BEA).
In other good news, consumer spending increased for the first time in two months, coming in at 0.1 percent. While this is slightly lower than expected, it’s stronger than the December and Jan. rate of -0.2 percent.
“Households are still flush with the money saved from the big drop-off in gasoline prices and, with the labour market still on fire, incomes should continue to increase at a solid pace. That provides the scope for a big gain in consumption in the second quarter,” said Ashworth.
But consumers were saving at a rate of 5.8 percent, the highest level in Feb. since 2012, according to the Bureau of Economic Analysis (BEA). Personal savings – or disposable personal income minus spending – was $768.6 billion in Feb., compared with $728.7 billion in Jan..
But this isn’t cause for alarm.
Low gas prices, a strong dollar and a steady growth in personal income suggest that consumers may have hit their savings peak.
“The unseasonably bad weather in Feb. partly explains why first-quarter GDP growth estimates have been falling in recent weeks, as the economic data covering that month trickles out,” said Paul Ashworth, chief economist at Capital Economics Ltd.
With temperatures slowly rising, increased money consumers saved at the gas pump from historically low gas prices will likely translate into increased spending in March.
Where might consumers spend their money in March? Digging a little deeper into the data from Feb., there was a 0.4 percent increase in spending on nondurable goods, like food and apparel. There was a decrease of 0.1 percent in durable goods like appliances and automobiles.
“I expect we’ll see spending outpace income over the next few months, including in March,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
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Kevin Hobbs, a software developer at World Courier said, “Most likely, the money I saved at the gas pump will go to spending this spring or summer.”
An anomaly to this is retail sales, which were down for a third consecutive month. Retail sales decreased 0.6 percent from Jan.. However, total sales for the December 2014 through Feb. 2015 period were up 2.9 percent, according to U.S. Department of Commerce.
“I suspect spending was held down by colder than usual weather in late Feb.,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
While the rising dollar means bad news for manufacturing and export-driven industries, it means the U.S. consumer will continue to get more for their buck. And low oil prices – while potentially devastating to oil-centric economies like Saudi Arabia or even Houston, Texas – will translate into lower gas prices and likely empower the consumer to spend some of their saved cash.
“Even if the first quarter is weak, the outlook for consumption over the remainder of this year looks good. Personal income increased by a solid 0.4% [month over month] in March and the saving rate shot up to 5.8% last month, from only 4.4% last November,” said Ashworth.
The Feb. 21 agreement to a labor dispute at major West coast ports is also a good sign for consumers, as the dispute that hampered business across the country.
For this and several other reasons, Christophe Barraud, Chief Economist Strategist at Market Securities said, “I’m betting on a rebound in Q2 and even in March…”