March 31, 2017
Personal consumption expenditures rose 0.1% in February after having risen 0.2% in January. However, consumption spending was robust in the four months between September and December. What we are really interested in is consumption spending in real terms (i.e., after adjustment for inflation) because that is what goes into GDP. On that basis consumption spending declined 0.1% in February after having declined 0.2% in January. Real consumer spending has risen 2.6% in the past year.
Because consumer spending is so volatile on a month-to-month basis, we find it helpful to look at a 3-month moving average which is what is shown above (in blue). That 3-month increase in real PCE is now 1.9% versus 2.6% in the past year. That is on the soft side, but the dropoff is expected to be temporary because consumer income is holding up nicely (see below).
Consumers feel great and confidence has increased in the post-election period. And why not? The stock market is at a record high level. Jobs creation is robust which is bolstering income, gasoline prices remain low, consumers have little debt, and rates will stay low for some time to come even if the Fed very gradually raises short-term interest rates, and now they will benefit from a cut in the individual tax rate.
Personal income rose 0.4% in February after having climbed by 0.5% in January. During the past year personal income has risen 4.6%. Real disposable income which is what is left after inflation and taxes has risen 2.3% in the past year.
With real disposable income climbing at a 2.3% rate and real consumption spending rising at a 1.9% pace, consumer spending should rebound slightly in the months ahead.
Real disposable income per capita is generally regarded as the best measure of our standard of living. It is currently rising at a 1.6% pace which is in line with its 1.6% average increase in the past 25 years. Somehow people seem to believe that because average hourly earnings has been growing slowly that our standard of living is growing much more slowly than it has in the past. That is not really the case.
People seem to have an impression that hourly wages are stagnant. That is inaccurate. They may have grown fairly slowly at about a 2.0% pace for a while, but hourly earnings have been steadily accelerating and are currently rising at a 2.5% pace. In addition, firms are paying workers in the form of incentive pay like bonuses and working them longer hours. Thus, income is growing at a respectable pace.
With personal income rising 0.4% in January and a 0.1% increase in consumption spending the savings rate rose 0.2% in February to 5.6% which is in line with its long-term average of 5.5%.