Americans keep spending beyond inflation, so economy holding up. But can incomes catch up?

On Thursday, we saw that consumer spending at the start of 2022 had its strongest quarterly performance since Q2 2021, and Friday's income and spending report for March backed that up, showing that inflation had not caused Americans to cut back.

Spending on services increased 1.1%, lifted by demand for international travel, dining out at restaurants as well as hotel stays. There were also increases in healthcare spending and outlays on recreation and transportation services.

Spending on goods increased 1.2%, mostly reflecting gasoline and other energy products, as well as food, whose prices have risen sharply. Spending on long-lasting goods like motor vehicles fell for a second straight month because of shortages.

Economists polled by Reuters had forecast consumer spending increasing 0.7%. Even with prices sky-rocketing, inflation- adjusted consumer spending eked out a 0.2% gain last month, highlighting the economy's underlying strength in an increasingly turbulent environment.

Americans have exceeded their inflation-adjusted pre-COVID spending in every month since March 2021 (when many Americans became eligible for vaccination). Even as prices have risen over the last year, consumer spending has gone up beyond inflation by another $317 billion (annual rate).

The spending increase in services is part of on ongoing shift back to pre-COVID habits after consumers switched to goods and related household items during the worst of the pandemic. And as many of us welcomed how "back to normal" things felt during March Madness this year, it was reflected in the continued comeback in spending for food services and accomodations, which had good increases in inflation-adjusted spending for both February and March.

The warning sign in that report comes from what is not keeping up with inflation - the disposable income that Americans have.

Higher spending with lower real disposable incomes are resulting in a rapidly declining saving rate, with March's rate being the lowest since the end of 2013. That is generally a good thing for the overall economy, but reflects a worrying reversion to habits from the decade of the 2000s, and we all know how THAT ended.

As I've said before, the general US economy is rolling along, with decent consumer spending growth and low unemployment. But there are a lot of cross-currents that aren't going to hold up in the longer term. Increased spending, lower savings, declining real incomes (due to less in stimulus spending and higher inflation), and higher prices aren't going to all continue for the rest of 2022. And these income and spending reports will go a long way toward telling us which part will go first, and take other parts of the economy along with it.