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Income Expectations Point to Slowdown in U.S. Consumer Spending

Consumers are turning more pessimistic about their income prospects, an indication that household spending will grow at a slower pace compared with a year earlier.

The share of Americans foreseeing a drop in wages over the next six months topped the proportion projecting an increase by 2.6 percentage points in June, data from the Conference Board, a New York research group, showed. That is the lowest reading since October 2010, according to Lynn Franco, director of the group’s consumer research center.

Weak income expectations will continue to “hold back” consumer spending, she said in an interview this week. “Overall, we expect growth in real personal consumption to remain sluggish, averaging less than 2.5 percent in the second half of this year” on an annual basis, said Franco.

Spending adjusted for inflation, known as real spending, grew 2.7 percent by that measure on average from January through April, before cooling to 2.1 percent in the 12 months ended May, according to figures from the Commerce Department.

Federal Reserve Chairman Ben S. Bernanke this week highlighted concern over Americans’ attitudes toward income in his semi-annual testimony to Congress. “Households report that they have little confidence in the durability of the recovery and about their own income prospects,” Bernanke said.

Photographer: Brendan Smialowski/Bloomberg

Customers get shopping carts at a Costco Wholesale Corp. store in Arlington, Virginia. Close

Customers get shopping carts at a Costco Wholesale Corp. store in Arlington, Virginia.

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Photographer: Brendan Smialowski/Bloomberg

Customers get shopping carts at a Costco Wholesale Corp. store in Arlington, Virginia.

The correlation between the three-month averages of income expectations and real spending is 0.88, according to Bloomberg News calculations. A reading of 1 would show they move in lockstep, while a value of zero means there is no relationship.

Precedent-Setting

The 18-month recession that ended in June 2009 marked the first time income expectations turned negative since the Conference Board began collecting data in the 1960s, Franco said. Pessimism persists two years later because of the “double whammy” of job losses and the drop in home values, which have left consumers “quite cautious” even as financial markets rebounded, she said.

The Standard & Poor’s 500 exchanged-traded fund has climbed 92 percent since reaching an almost 13-year low on March 9, 2009, at the depth of the recession. The recovery has boosted finances of higher-income consumers, Franco said, and has contributed to a rise in their confidence and spending.

The correlation between real household purchases and income expectations began to diverge in the fourth quarter of 2009 as spending outpaced the wage outlook. Had the relationship held, with income expectations now at negative 0.2 percent on a three- month average basis, spending would be growing at a rate no more than 1 percent instead of the current 2.4 percent, according to calculations by Bloomberg News.

Affluent Investors

The positive influence from gains in stock prices enjoyed by more affluent consumers has contributed to the divergence, according to Doug Cliggott, a Boston-based U.S. equity strategist at Credit Suisse Group AG.

The Consumer Discretionary Select Sector SPDR Fund (XLY), which includes companies like McDonald’s Corp. (MCD), Amazon.com Inc. (AMZN) and Walt Disney Co. (DIS), hit an all-time high relative to the S&P 500 earlier this month, even amid negative income expectations and a sluggish housing market. Since the market bottomed in March 2009, the fund has climbed 150 percent, outperforming the S&P 500 by 58 percentage points, according to data compiled by Bloomberg.

Such gains defy the economic fundamentals of weak labor and housing markets, Cliggott said, one reason he maintains an “underweight” rating on the Consumer Discretionary Fund.

Stocks Outlook

“It’s going to be extremely difficult for stocks in this sector to continue to outperform, particularly given the very muted income growth that we’re likely to see,” Cliggott said.

It’s unusual for consumer discretionary stocks to outperform in the third year of an expansion because investors tend to rotate out of these types of early-recovery investments as the expansion ages, he said.

“We think that most of the cyclical stock-market gains are behind us rather than ahead of us,” Cliggott said.

U.S. employers added 18,000 workers to payrolls in June, the smallest gain in nine months, while the unemployment rate unexpectedly climbed to 9.2 percent, a Labor Department report showed last week. Consumer confidence probably won’t advance until the job market improves, Franco said.

“Confidence and income expectations are likely to remain at these lackluster levels until the economy gains momentum,” Franco said.

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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