Incomes Flat, But Spending Up

So we end the week with a little more insight into consumer behavior. The numbers for August show a scant 0.1% rise in personal incomes, continuing what is now a well established trend of very mediocre gains. In contrast, spending rose at a 0.5% clip, implying that households dipped into savings in order to spend. This is the second month in a row that we have observed this pattern so it is worth thinking through for possible implications.

First the pessimistic view.

With incomes not rising strongly people are being forced to use savings to augment those incomes as they spend. Consumption throughout the year has been at a low rate suggesting that households are still concerned about job security, debt levels, and their prospects for growth. This hesitancy to spend has been breached only by the need to replace worn out cars and other large ticket items, two categories of spending that have bucked the trend during the past few months. Once those things have been replaced, so this view goes, people retreat back to their defensive posture to wait out the lingering storm.

Second, the optimistic view.

Households are now showing the first concerted signs that they have paid down debt sufficiently to undertake significant purchases like new cars and other durable goods. And they are growing in confidence enough to do this spending from savings rather than directly from incomes. When coupled with recent gains in measures of consumer confidence the willingness to delve into savings suggests that households are less worried about job security, have their debt levels under control, and are more upbeat about their prospects. This view then supports the argument that we are nearing the end of retrenchment and that consumption will pick up steadily over the next few quarters.

Both views can be argued from the current facts. So which one is likely to prevail?

Well, unusually, I am going to hedge a little.

I think the signs are good that the recovery is well established and that households are feeling better about the future. This augurs well and is supported by many of the figures we are now seeing. But, the speed of improvement will remain weaker than that necessary to lift us out of the current doldrums without an additional injection of stimulus to provide one last kick across the finishing line. Unfortunately getting such a kick is unlikely – all the talk is still wrongly focused on austerity – and all the major risk factors are negative – the muddle in Europe and our own debt debate being the primary negatives weighing us down.

So, while I think people are primed and ready to go, our leadership isn’t. What leadership we have is off on its own fighting unnecessary battles against enemies like inflation that don’t exist and ignoring those that need vanquishing like the paucity of demand.

The troops are ready. The generals aren’t. Oh well.