April 29, 2022

Personal consumption expenditures jumped 1.1% in March after having risen 0.6% in February and 2.0% in January.  Despite lots of worries about inflation and the pace of Fed tightening, the consumer continues to spend.

What we are really interested in is “real” or inflation-adjusted spending.  That is what goes into the GDP calculation.  After adjusting for inflation real consumption spending rose 0.2% in March after having risen 0.1% in February and 1.5% in January.  Thus, inflation is eating away at the nominal increase  However, over the past six months real spending is still rising at a respectable 2.2% pace.  What this means is that workers have been able to put the pressure on their employers to boost wages by enough to allow them to keep spending at a moderate pace in real terms.  The downside of those higher wage gains is that there will be continued upward pressure on the inflation rate.

Personal  income was rose 0.5% in March after climbing 0.7% in February and 0.2% in January.  The recent gains in income are being driven by the wage component which reflects continued growth in employment.  The wage component of income rose 0.5% in March after rising 1.0% in February and 0.5% in January.  Fueled by steady job gains wages have risen 10.6% in the past year.

But real disposable income — what is left after paying taxes and adjusted for inflation — fell 0.4% in March after rising 0.1% in February after declining 0.3% in January.  In the past year this series has fallen 19.9% but that annual figure is distorted because of the surge in income in March of last year caused by the last round of stimulus checks.  Falling real wages in the past several months are causing workers and unions to push for higher wages to compensate.  Thus, we expect wage growth to continue to grow rapidly, perhaps even faster than it already is.  Real disposable income should resume its positive growth in the second  half of the year as workers are able to secure larger wages at the same time that inflation moderates slightly..

The savings rate surged to 33.8% in April of last year as the economy was essentially shut down.  It has since declined to 6.2% which is slightly below its long-term average of 7.0%.  Consumers have been able to maintain a reasonable pace of spending and still manage to save at a rate roughly in line with its historical average.

We expect GDP growth of 2.0% in 2022 as more labor becomes available and as supply bottlenecks are alleviated later in the year.  We expect GDP growth of  2.5% in 2023 as more of those supply bottlenecks disappear .

Stephen Slifer


Charleston, SC