Not All Is Sunny in Consumer Spending Report
On the heels of yesterday's revised estimate of first-quarter U.S. gross domestic product, we got up-to-date information today about the spending and saving patterns of American consumers. The broadly positive news likely helped this week's stock rally to continue, but those looking at the economy over the longer term should keep a wary eye on disposable income.
Real personal income after taxes grew by 0.4 percent in May. If that pace can be maintained, it would translate into a 12-month gain of about 4.9 percent. Excluding a few unusual bumps (including the dividend payments made last year in advance of the tax hikes associated with the "fiscal cliff," as well as Microsoft's enormous special dividend in 2004) this would be the fastest annual growth rate in household spending power since the late 1990s. Encouragingly, the Bureau of Economic Analysis revised its estimate for real disposable income growth in April to 0.3 percent, up from the original 0.1 percent.
Spending has been growing more slowly than income since January. Initially, the savings rate plunged to 2.2 percent in January, from an average of about 4.2 percent in October and November. (The dividend payments in December mean that some of the data from that month need to be interpreted with caution.) However, the personal savings rate has steadily increased from that low level to 3.2 percent, despite the hefty tax increases.
That could be bad, since each person's spending ends up as someone else's income somewhere. Right now, however, it means that U.S. households are saving more, and thus the rest of the economy -- foreigners, the government and businesses -- has to be saving less. Given the continued narrowing of the federal budget deficit, this suggests that corporate investment and net exports are finally starting to pick up some of the slack. That would be a welcome development.
We can do better. Personal income comes from a few different sources: employee compensation, financial assets, ownership of small businesses, transfers from the government. (Unsurprisingly, interest income has ticked noticeably higher in the past couple of months.) Despite relatively rapid growth, the level of pretax employee compensation is still below where it was in December, 2012. Some of that probably reflects the distortion caused by tax hikes as some employers probably paid larger year-end bonuses. Still, the pretax wages and salaries of employees in private industries were less than half of one percentage point higher in May 2013 than in November 2012.
It's worse after taxes and inflation are taken into account. Real disposable personal income in May is 0.6 percent lower than it was in November. Considering that the economy is still growing relatively slowly and that unemployment remains unacceptably high, those tax increases seem like a needless self-inflicted wound.
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