July 31th, 2012
Personal income growth accelerated to +0.5% in June and real disposable personal income, the prime source of consumers’ spending power, advanced by 3.3% in the second quarter, very close to the rate in the first quarter (+3.4%). Real consumer spending, however, decreased 0.1% last month after increasing only 0.1% in May. Dealers interpret the significance of the latest income and spending data in different ways with some calling for consumers to dig in their heels in the second half of the year while others see a coiled spring of household demand that will loosen as early as the current quarter.
UniCredit Economics & FI/FX Research believes the fundamentals for a renewed pick-up in consumer spending are in place. “Real disposable income has risen solidly over the last several months and while that comes on the back of a period in which spending rose faster than income, the latest development unequivocally corroborates our view that households’ purchasing power has so far defied the slowdown in the labor market. Moreover, the higher savings rate (at a 12-month high) provides a buffer against the latest pick-up in gasoline prices and against potentially higher food prices in the coming months (as a result of the drought).”
Credit Suisse US Economics said the good news is that solid income growth and soft spending replenishes personal savings, but the bad news is that there is no momentum for spending in the third quarter. “With real spending down in June, there is serious absence of statistical “carryover” for the Q3 arithmetic. The June spending level was -0.2% annualized below the average for the quarter overall. This implies monthly real PCE would have to speed up – to 0.2% average, from 0.0% average over the last three months, and 0.1% over the last six months – just to get back to 1.5% QoQ annualized real PCE growth in Q3. A 0.3% average monthly track would be required to get real PCE back above 2% for the quarter. The higher statistical hurdle is one reason we revised down our Q3 GDP estimates – to 1.5% (from 2.2%) last week.”
Citi Research also emphasized the fact that the June level of spending was 0.2% annualized below the 2Q average. “This provides some negative statistical momentum for 3Q consumer spending measures, and should weigh somewhat further on forecasts for the current quarter.” Nevertheless the primary dealer offered, “If the latest recovery in income persists, it would provide a hopeful sign for future spending potential. This is particularly the case if the 1.0% drop in consumer durable spending, apparently a function of some drop in vehicle sales after earlier rapid gains, is just “payback.” (Real consumer durable sales rose 11.5% and 13.9% annualized in the prior two quarters. However, the most timely anecdotes regarding consumer spending in 3Q continue to suggest a lull.”
With the labor market weakening and corporations becoming more cautious, Bank of America Merrill Lynch US Economics expects income growth to slow through year-end, curbing consumer spending. “Despite this recent uptick, the saving rate remains on a surprisingly low trajectory. Typically, when faced with a massive negative wealth shock, consumers would want to increase savings to repair their balance sheets. We believe the saving rate will continue to slowly edge higher, leaving consumer spending to lag overall growth.”
RBS Economics called the rise in the saving rate “the bright side of the weaker spending trend of late” but warned, “The fact that spending ended the quarter on a soft note presents a statistical headwind in Q3 (i.e., we have to dig out of the hole left at the end of Q2). Inflation-adjusted gains of 0.2% (much stronger than the recent trend) are needed in each month for real PCE to rise 1.5% in Q3 (our current forecast, which now looks aggressive).”
While it described the income data for June as “decent”, J.P. Morgan North America Economic Research cautioned, “Real consumption was softer than anticipated and the revisions to consumption for the prior few months also did not help the trajectory for the spending data headed into the third quarter. We do not have any hard spending data in hand for 3Q yet, but given the trajectory in the data through June and our expectations for inflation to pick up somewhat during the current quarter, it now looks like achieving our 2.1% forecast for consumption growth in 3Q will be challenging, generating some downside risk to our GDP forecast (1.5%).”
Economists at BNP Paribas Global Markets suggested, “The report confirms that the post-Japan surge in auto spending is behind us and consumers are returning to a cautious stance as they face uncertainties about job and income security as well as fiscal policy and future tax liabilities. On a three-month annualized basis, real consumption is growing at a mere 0.6% pace, leading to a weak start for Q3. We continue to expect increased purchasing power from lower energy prices to unlock some discretionary spending as the quarter unfolds, however, we have yet to see any indication of this and so risks are for a weaker outcome.”
Barclays Economics Research remarked, “While consumption certainly ended Q2 on a soft note, the gains in income and the rebound in saving should provide a solid backdrop for stronger spending growth in Q3, something factored into our GDP forecast [currently 2.0%].” Meanwhile, UBS Investment Research wrote, “The saving rate has risen from 3.6% at the end of Q1 and 3.4% at the end of Q4—with a corresponding drag on spending growth. We see little reason to expect further increases: the drag on spending from a rising saving rate is probably past.”
Deutsche Bank Global markets Research noted that over the past 12 months, wages and salaries are up 3.5%, less than the current 5%-plus run-rate on employee tax withholding receipts. They also called the savings rate “a flawed measure of household finances given its strong propensity to be consistently revised upward.” The combination of the two factors allows DBGMR to maintain its above-consensus forecast for real GDP growth in the third quarter. “With household deleveraging proceeding swiftly and with household liquid assets to liabilities at a 10-year high, we expect consumer spending to accelerate after what was an intra-Q2 slowdown: real consumer spending was up 0.2% in April, +0.1% in May and down -0.1% in June. Some of last months’ weakness was in durable goods (motor vehicles), which may reverse this month. These figures were incorporated in the Q2 real GDP report; hence, we are not making any changes to current quarter growth, estimated at +2.7%.”
The Economics Group at Wells Fargo Securities believes consumers are building their purses for the holidays. “The Federal Reserve’s attempts to push the U.S. consumer to consume rather than to save are still hampered by uncertainty in the future of the U.S. economy. The fact that U.S. consumers continue to increase their rate of saving rather than consume in this low interest rate environment continues to defy economic theory. The best explanation for this behavior is that individuals are hoarding cash to continue to build a protective layer in case the economy and their personal situation turns negative. Consumers may be able to unload these savings if conditions improve during the holiday season. Let’s hope that this is the case.”
Paced by a 0.6% rise in wage and salary disbursements in private industries, June provided a welcome boost to personal income that has the potential to propel consumer spending over the coming months. If the underlying trend should more clearly point to positive momentum in wage and salary growth, consumer spending should be higher in the third quarter than in the anemic second quarter. Friday’s jobs report (both the number of Americans working and their wage disbursements) will be the key determinant of consumer spending growth.