Uneven growth or signs of recession? Don't know yet

I had mentioned last week that Friday’s reports on income and spending from the Bureau of Economic Analysis (BEA) would be an important indicator of what the economy was really doing at the start of 2019. This was especially the case due to a few recent economic reports which indicated slowdowns and outright declines in some sectors.

Well, we got that report on Friday, and it continued the theme of shakiness, but not outright recession. Due to the government shutdown at the start of the year, the report only had spending information for January, but did have income items for February along with revisions for January, and it led to a mixed message.

Personal income decreased $22.9 billion (-0.1 percent) in January according to estimates released today by the Bureau of Economic Analysis. Disposable personal income decreased $34.9 billion (-0.2 percent), and personal consumption expenditures increased $8.6 billion (0.1 percent)….

Personal outlays increased $6.3 billion in January (table 3). Personal saving was $1.19 trillion in January and the personal saving rate, personal saving as a percentage of disposable personal income, was 7.5 percent (table 1).

Personal income increased $42.0 billion (0.2 percent) in February. Disposable personal income (DPI) increased $31.3 billion (0.2 percent); Real DPI is unavailable for February.

The increase in personal income in February primarily reflected increases in wages and salaries, government social benefits to persons, and proprietors’ income that were partially offset by a decrease in personal interest income.

The income changes are more a reflection of one-time comings and goings, as the changes for wages and salaries and other main sources of income have been pretty stable over the last 3 months measured (shown in dark blue in the chart below).

On the spending side, the small 0.1% increase didn’t come close to making up for the 0.6% drop that happened in December, when spending dropped by the most in one month in nearly 10 years. The lack of spending in the last 2 months measured has spiked the saving level back to where we were in 2015, well above 7%.

And consumer spending still appeared to be soft in the next month, as the Census Bureau came out with its initial report of retail sales for February (today). In fairness, the decline measured in February was offset by an upward revision for January.

Advance estimates of U.S. retail and food services sales for February 2019, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $506.0 billion, a decrease of 0.2 percent (±0.5 percent)* from the previous month, but 2.2 percent (±0.7 percent) above February 2018. Total sales for the December 2018 through February 2019 period were up 2.2 percent (±0.5 percent) from the same period a year ago. The December 2018 to January 2019 percent change was revised from up 0.2 percent (±0.5 percent)* to up 0.7 percent (±0.3 percent).

What’s concerning about the February figures for retail is that gas prices started to rise that month, but all other areas were down 0.3%, and down 0.6% if you take out cars and gas stations. I can’t see where that helps reverse the tide of the numerous brick-and-mortar stores closing, especially when that part of retail continues to decline in sales while non-store retailers like Amazon are up 10% year-over-year.

The last report I want to bring up was also from the Census Bureau, and it said that seasonally-adjusted construction spending in the US was up by an impressive 1.0% in February vs January (+$13.0 billion). But dig into the report, and you’ll find that increase was heavily concentrated onto one side of the economy.

Private Construction
Spending on private construction was at a seasonally adjusted annual rate of $994.5 billion, 0.2 percent (±0.8 percent)* above the revised January estimate of $993.0 billion. Residential construction was at a seasonally adjusted annual rate of $540.9 billion in February, 0.7 percent (±1.3 percent)* above the revised January estimate of $536.9 billion. Nonresidential construction was at a seasonally adjusted annual rate of $453.6 billion in February, 0.5 percent (±0.8 percent)* below the revised January estimate of $456.0 billion.

Public Construction
In February, the estimated seasonally adjusted annual rate of public construction spending was $325.8 billion, 3.6 percent (±1.6 percent) above the revised January estimate of $314.4 billion. Educational construction was at a seasonally adjusted annual rate of $76.3 billion, 0.8 percent (±2.0 percent)* above the revised January estimate of $75.7 billion. Highway construction was at a seasonally adjusted annual rate of $111.1 billion, 9.5 percent (±5.3 percent) above the revised January estimate of $101.5 billion.

So $10 billion of the $13 billion increase in construction for February was in taxpayer-funded highway construction.

Go over the last year, and private sector construction spending was DOWN by 1.9% compared to the totals in February 2018, and residential construction was down 3.4% (nearly $20 billion). Only a $33.5 billion increase in public construction has kept the sector afloat, which you should keep in mind if “small-government” Republicans claim that construction is going great in US (see, Keynesian spending works!).

These recent trends make me wonder what picks up the difference if rising budget deficits in DC start leading to spending cutbacks on that side. It could mean the start of construction layoffs in a sector that has had quite a bit of employment growth in recent years (nearly 2 million jobs since 2011, and over 1.4 million in the last 5 years).

The economy still seems at a crossroads where some parts of it look like they’re stagnating if not outright declining, but wage and employment growth continue to hold up, and bits of growth continue in other places. So we remain in a state of concern, but not a state of panic. To be continued….