April 26, 2024

Personal consumption expenditures jumped 0.8% in both February and March. The consumer is still willing to spend despite worries about inflation and the pace of Fed tightening.

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 0.5% in both February and March.    In the past year real spending has risen 3.1%. The consumer’s willingness to spend has been fairly steady since the beginning of last year even though his or her purchasing power has been eroded to some extent by inflation.

Personal  income rose 0.5% in March after climbing 0.3% in February.  The growth in income is being fueled by growth in wages which climbed 0.6% in March after gaining 0.7% in February. Firms are under worker pressure to raise wages (given that average hourly earnings in real terms fell for two years).  As a result, wages have risen 5.7% in the past year.

Real disposable income — what is left after paying taxes and adjusted for inflation — rose 0.2% in March after declining 0.1% in February.    In the past year real disposable income has risen 1.4%.  This measure needs to grow somewhat more quickly to sustain a 2.7% pace of real consumer spending.

The savings rate fell 0.4% in March to 3.2% after declining 0.5% in February.  Consumers are saving much less of their paycheck each month than what they have done historically.  In the 10-years prior to the 2020 recession the savings rate averaged 7.0%.  With real disposable income rising at a 1.4% pace in recent months consumers cannot continue to spend at a 2.7% rate for too much longer.

Consumers are spending, but are beginning to struggle. To maintain their pace of spending they are beginning to run up their credit card bills.  That is OK for a while because they have very little debt in relation to income currently, but that is not a sustainable situation.

Thus far the additional debt has not been a problem.  If that were the case, delinquency rates on consumer debt should have begun to rise.  That is not yet the case.

We expect GDP to rise roughly 2.2%  in each of the next three quarters.    Steady job gains and significant wage gains will provide enough fuel to keep the economy growing slowly for some time to come.

Stephen Slifer


Charleston, SC