Sunday, June 3, 2018

Americans still spending more despite mediocre pay raises. What trend breaks first?

Late last week, the US's personal income and spending report came out for April. This is a report I've been keeping my eye on not only because I wanted to see if spending was picking up after the GOP's tax cuts took effect at the start of this year, but also because I've noticed a troubling return to the spendy ways of the mid-2000s for American consumers, and we all should remember how that crashed down by 2007-08.

This month's report had a couple of interesting indications on those fronts. The first is that for the first time since those tax cuts came into effect, we saw a bit of a jump in spending to go along with decent increases in income.
Personal income increased $49.5 billion (0.3 percent) in April according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $60.9 billion (0.4 percent)and personal consumption expenditures (PCE) increased $79.8 billion (0.6 percent).

Real DPI increased 0.2 percent in April and Real PCE increased 0.4 percent. The PCE price index increased 0.2 percent. Excluding food and energy, the PCE price index increased 0.2 percent.
Granted, some of that spending increase had to do with rising gas prices and consumption. But it's a noted increase from the flatline we saw in consumption in the first couple of months of 2018, and March's increase was also revised up by $12.8 million. So let's see if the tax cuts are finally encouraging people to spend a bit more, because there was little evidence of it until recently.

But on the flip side, incomes continue to rise by less than consumer spending goes up, with the lag being more than $30 million in April (and nearly $38 million if you count interest payments and Social Security taxes). And wages and salaries still haven't seen any notable increase from what we were seeing this time last year, even with lower unemployment and tax cuts.

Which means that the US's savings rate is falling again, back below 3%, like we saw at the end of 2017, before the tax cuts gave a short-time boost due to higher disposable incomes.

Much like how the low unemployment rate and low wage growth isn't a trend that is likely to hold up for much longer, I think that this "low-savings, mediocre income growth, rising housing and gas prices" trend can't continue either.

The three ways this situation will seem to turn out are as follows - 1. Incomes grow and catch up to spending, meaning a 1990s-style economic boom 2. People stop spending so much and start saving more, leading to recession and a bursting of the housing bubble many places are in. 3.Wages pick up but spending does not, meaning inflation first, and then higher interest rates and 1970s-style stagflation after that. And I think we may know which answer is coming by the November elections.

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