Consumer Incomes and Spending: Is Consumers' Optimism Justified?

With the release this morning of the Personal Income and Outlays report and data that has already been released, we can see differences between consumers' attitudes and those of businesses. In some sense, the disconnect between the two seems to even defy logic, with consumers ramping up spending on big ticket items even though their incomes aren't growing. Businesses have demonstrated much less optimistic hiring patterns, as worries about the fiscal cliff and Europe abound. Let's begin with the data from this morning's report from the Bureau of Economic Analysis (BEA). Consumers' real disposable incomes (after taxes and inflation) were flat in September after a -0.3% dip in August. This represents a deceleration in income growth from prior months, following a long string of months with little gains. In fact, real disposable personal incomes in September are now at the same level as they were in May. And when you exclude transfer payments (things like unemployment and disability benefits, along with Social Security), incomes fell by -0.1% in September, following a -0.2% drop in August. While wages have been growing a bit during these months in nominal terms, at a monthly rate of 0.3% in September and 0.1% in August, this hasn't kept up with inflation. The BEA's inflation measure, the marked-based Personal Consumption Expenditures (PCE) gauge of price increases, advanced 0.4% in both September and August.Despite a lack of real wage gains, real consumer spending has advanced in recent months. In September, real consumer spending climbed 0.4% in September, and by an even greater 1.3% in the smaller and more-discretionary category of durable goods. Consumer spending on non-durable goods (things like food, clothing, energy, etc.) advanced 0.5%, while outlays on services edged up 0.2%, after inflation.Since May, even though their incomes haven't grown, consumer spending after inflation advanced by a total 0.8% since then, while spending on durable goods (things like cars, washing machines, televisions, etc.) climbed an even greater 3.6%. This category tends to be more discretionary and includes big-ticket items, and can involve consumers undertaking additional debt, which we have indeed seen with data on consumer credit. Auto loans have indeed grown in recent months, indicating consumers are feeling better. And consumer sentiment, as reported by the University of Michigan, is now at a five year high, since just before the Great Recession began. We can see that consumers are feeling more optimistic in today's data by looking at the savings rate, which was 3.3% in September, down from 3.7% in August, and had been as high as 4.4% as recently as June. When consumers decrease their savings rate to fund bigger ticket purchases, their expectations for income growth generally tends to increase.But are those expectations reasonable? Or is this the Wile E. Coyote economy, where the consumer doesn't realize that we may go over the fiscal cliff, well after their employers had battened down the hatches and prepared for a possible recession? The non-partisan Congressional Budget Office predicts we'll have a recession in 2013 if we do go over the edge of the fiscal cliff. This, of course, remains to be seen, but businesses aren't taking as many chances as consumers are. The Business Roundtable, which is a large-business trade organization, reports in their third quarter survey that a net 7% project their employment levels to decrease in coming months. This is a big change from the second quarter survey, when a net 16% of big companies projected their employment to increase. The fiscal cliff, along with Europe, was cited by these CEOs for curtailing hiring plans.Or you could ask small companies what they think. A small business trade group, the National Federation of Independent Businesses, surveys their members each month. In the most recent survey, titled, “Hiring Plans Plunge,” the organization reports the net percent of owners planning to create new jobs fell 6 points to 4%, a “historically weak reading, especially in a recovery. Essentially, hiring is keeping up with population growth, but not exceeding it.”So, going back to today's report on consumer incomes and spending, it may be hard for consumers to keep up their shopping habits, especially on big-ticket, discretionary items, when their employers aren't willing to hire, or by extension, give pay raises. Spending, at some point, must be tied to incomes, and looking ahead, aggregate wages and salaries might not be expected to grow by much. That can constrain spending in coming months.