Bad income and spending numbers indicate sluggish late Summer

Friday featured more US economic data that indicates we may have seen a late-Summer swoon, and that the 3.1% GDP growth for Q2 2017 won’t continue in Q3.

Personal income increased $28.6 billion (0.2 percent) in August according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $14.9 billion (0.1 percent) and personal consumption expenditures (PCE) increased $18.0 billion (0.1 percent).

Real DPI decreased 0.1 percent in August and Real PCE decreased 0.1 percent. The PCE price index increased 0.2 percent. Excluding food and energy, the PCE price index increased 0.1 percent….

Real PCE spending in August decreased $8.4 billion due to a decrease of $20.2 billion in spending for goods that was partially offset by a $9.2 billion increase in spending for services (table 7). Within goods, spending on new motor vehicles was the leading contributor to the decrease. Within services, healthcare spending was a leading contributor to the increase.

That’s not good, as it made August the first month to have a real decline in both disposable incomes and spending since January 2016. In addition, both the June and July figures were revised down by small amounts, giving more evidence for an earlier observation I made that August and September may be a bit soft for the overall economy.

I still don’t think we are in recession or anything like that, and indeed some of these August and September figures could be held back a bit by hurricanes. But there are a couple of other statistics in this report that make these numbers concerning.

The inflation index that is part of the income and spending report was at its lowest level in nearly a year (1.4%). That isn’t going to last with oil prices on the rise in the last couple of weeks, which means spending and incomes have to pick up even more to keep pace.

The personal saving rate has consistently dropped in the last 2 years. It was at 3.6% in August and has been under 4% in each of the last 6 months. You’ve got to go back to early 2008 to see that, as the housing market was starting to implode and right before gas would spike past $4 a gallon that Summer due to a Wall Street bubble.

And while Donald Trump may be touting record highs in the S&P 500, Harvard’s Jeffrey Frankel sees warning signs abound, and is getting flashbacks to a decade ago. As Frankel explains on Econbrowser, there are several economic events that are in play which would give a serious jolt

· Bursting of stock market bubble. Major stock market indices hit new record highs this month (September 12), both in the United States and worldwide. Equity prices are even elevated relative to such benchmarks as earnings or dividends. Robert Shiller’s Cyclically Adjusted Price Earnings ratio is now above 30. The only times it has been this high were the peaks of 1929 and 2000, both of which were followed by stock market crashes.




· Bursting of bond market bubble. Alan Greenspan has suggested recently that the bond market is even more overvalued (by “irrational exuberance”) than the stock market. After all, yields on corporate or government bonds were on a downward trend from 1981 to 2016 and the market has grown accustomed to it. But, of course, interest rates can’t go much lower and it is to be expected that they will eventually rise. (worth noting, the 10-year note has gone from 2.07% to 2.33% in the last 3 weeks, and is up 10 basis points since Wednesday).

· What might be the catalyst to precipitate a crash in the stock market or bond market? One possible trigger could be an increase in inflation, causing an anticipation that the Fed will raise interest rates more aggressively than previously thought. The ECB and other major central banks also appear to be entering a tightening cycle….

The current risk-on situation is reminiscent of 2006 and early 2007, the last time the VIX [volatility index] was so low. Then too it wasn’t hard to draw up a list of possible sources of crises. One of the obvious risks on the list was a fall in housing prices in the US and UK, given that they were at record highs and were also very high relative to benchmarks such as rent. And yet the markets acted as if risk was low, driving the VIX and US treasury bill rates down, and stocks, junk bonds, and EM securities up.

I admit I’ve been wrong about the continued bull market and (now 8-year) economic expansion before, but I do see some data points that make me wonder how long the good times can (or should) last. And it’s not like there’s stable leadership in DC to right the ship or deal with things realistically if things do go wrong.

I’m not saying you need to put all your money under the mattress. I’m not doing that, (although like most people under 50, I don’t have much of a choice either). I’m just saying…