The perplexing US consumer | FT Alphaville

The perplexing US consumer

The more we read about recent US consumption activity, the less we seem to understand exactly what’s happening.

But that won’t stop us from trying. Get comfortable, folks — this will take a while.

Consumer sentiment

Certainly the discouraging news on consumer sentiment was coming in spades through the middle of this week. Last Friday’s UMich consumer sentiment index hit a five-month low, Tuesday’s Conference Board survey was equally bad, and a Gallup tracking poll reported a big weekly decline in self-reported spending. (We’re including the Gallup poll as a sentiment measure because of its imprecision.)

On Thursday came a new report, this one from RBC, telling a different story — the consumer outlook for April is better than it was for March.

Not helping the confusion has been the variability from month to month of each indicator. Both the UMich and Conference Board numbers each hit three-year highs just in February. The Gallup poll showed consumption behaving erratically since the start of the year, and the RBC report was a reversal of three straight monthly declines.

There is, however, one thing that’s been consistent across these reports, which is that consumers increasingly expect higher inflation this year. No surprise there.

Incomes and spending

Forget sentiment: understanding actual consumption trends hasn’t been much easier.

Monday’s personal income and outlays report for February was mostly interpreted through the lens of rising oil and food prices, with the savings rate declining as Americans spent more on the basics while their spending on everything else was stagnant. Makes sense, but that’s not the whole story.

Incomes climbed 0.3 per cent in the month, following a big 1 per cent increase in January, mostly a one-time boost from the December tax cut compromise.

Overall spending (before adjusting for inflation) in February climbed by an impressive 0.7 per cent, much better than the 0.2 per cent increase in January, which was the lowest increase since last summer. But when stripping out food and energy costs, that February number was itself a less impressive (though still positive) 0.2 per cent.

Adjusting for inflation, overall spending in February climbed 0.3 per cent in after staying flat (revised) in January. Not good, and certainly a steep decline on the trend in the fourth quarter.

But it wasn’t all bad news. Spending in February increased across nearly all items. And inflation-adjusted spending on everything save food and energy increased 0.4 per cent. Don’t take our word for it — click to enlarge the gargantuan chart, source here, showing real consumption by major type of product (in chained 2005 millions of dollars, seasonally adjusted at annual rates). You’re looking for item number 25, PCE excluding food and energy:

So the rate of increase in real spending outside of food and energy actually jumped nicely from January to February. Dan Indiviglio, who had one of the more positive assessments of the income and outlays report, reminds us that the earlier February retail sales numbers also showed decent spending outside of food and gas.

That doesn’t make the latest income and outlays report a good one. It wasn’t. But neither was it any kind of a disaster. More on this in a minute.

The savings rate

Its behaviour over the past year:

The rate ticked down to 5.8 per cent in February, lower than the (revised) 6.1 per cent it reached in January. But it was higher than any other month since September.

As the recovery finally picked up steam in the fourth quarter, spending increased as Americans slowed their pace of deleveraging. Now Americans are making more (partially due to the tax cut deal in December), still spending a bit more each month, and simultaneously saving more. This may also reflect how the crisis had a small but permanent impact on the amount of precautionary savings people desire, as we explained in a post last week.

Americans aren’t just shifting money to food and energy that we otherwise would have spent on other things; we could have kept increasing spending at rates similar to those in the fourth quarter just by maintaining the same savings rate, but we chose not to (and who can blame us?).

Which brings us to our next point.

How much more will food and gas prices affect spending?

No idea, but we can’t think of a better answer than this one from Tim Duy:

The higher saving rate provides some cushion for higher food and energy prices, allowing households to absorb and adapt to these price gains without an abrupt change in behavior.  It is worth noting that although the recent increases appear dramatic, they are consistent with a return to the prerecession trend:


For much of that period, the economy managed to weather commodity price inflation.  It was only the superspike in prices coupled with the evolving US financial crisis that brought spending to a standstill in 2008.  Hence, I tend to think the economy can withstand the gains already experienced, but continued gains at recent rates would be increasingly worrisome.  Remember, in comparison the previous energy shocks, prices have not yet gone to new highs.  Psychologically, we have yet to see new territory.

Perhaps a bit more worried, James Hamilton provides an updated graph showing energy expenditures as a percentage of total spending:

A 6% expenditure share marked the point at which we started to see significant consumption responses a few years ago. The share in February is essentially there (5.98%, to be exact), the highest it’s been since October 2008. …

Not surprisingly, overall spending on other items is slowing down. Real personal consumption expenditures grew at a 3% annual rate in February after falling slightly in January. Bill McBride (and you know I don’t like to argue with him) thinks this means real consumption spending for 2011:Q1 may only grow at a 1.4% annual rate. That’s less than half the rate that many analysts had been anticipating prior to Monday’s data.

The improvement in February from January wasn’t enough to offset analysts’ diminishing expectations for growth this year — and at these energy price levels, there’s good reason after all to be nervous about a long-lasting psychological impact on consumers. Hence the analysts scrambling to revise down their forecasts.

More than one kind of consumer

It’s hard to find more precise data on how consumption has differed across income and wealth groups in the recent stages of the recovery, but there is some anecdotal and survey evidence showing that it’s been driven disproportionately by high-income earners.

See, for example, this Bloomberg Businessweek story that we’ve linked to before, or this WSJ piece comparing the earnings of luxury retailers vs those of household-product makers. The distinction also applies to different categories within the UMich sentiment index.

We know that rising energy and food prices hurt low- and middle-income earners especially hard, making them acutely vulnerable to further increases.

As for the wealthier spenders, they’re probably more sensitive to the direction of the stock market, which has been volatile in the first quarter but has finished strong. Regardless, there’s no real way of knowing how this group will react, or is reacting, to the vagaries of the market. But we wanted to note this before moving on.

“Pent-up demand

A new Moody’s Analytics paper gets into the weeds of the recent Conference Board survey and finds a peculiar contrast between “pessimism on a general level and optimism about spending money on specific items”. These items include big-ticket purchases such as cars, large appliances, and even homes.

Their conclusion: there is pent-up demand waiting to be unleashed. Since this post is already starting to rival Moby Dick in length, we’ll just a post the three charts from the paper.

Not so fast, says Julia Coronado of BNP Pariba (via Free Exchange), who cautions not to read too much into just a couple of months’ spending figures. The problem is that people had previously read too much into the figures from Q4, but the longer-term recovery trend hasn’t actually changed much:

While consumers are spending, as shown in the chart above, there has been no sign of pent up demand. Real consumer spending on goods fell off its pre-2008 trend line during the recession and has since resumed its former pace with no indications that a surge in spending to make up for lost time is imminent.

The burst of spending in Q4 was bound to be followed by some moderation with or without higher food and energy prices. The tax of higher inflation robbed consumers of the benefits of the payroll tax cut and has left their confidence shaken, which appears to be producing a greater than anticipated moderation. If firms keep adding jobs, this will prove to be a nothing more than a slow patch.

(As for that last line, all eyes on this morning’s big employment report.)


Yeesh, we don’t know where to start. The rate of spending increase has obviously decreased from the fourth quarter of last year, much more than expected — and that’s leading analysts to sensibly re-examine their forecasts for this year’s growth.

At the same time, we’re somewhat surprised that given what’s happened this year — further oil price rises, turmoil in the Middle East, declining house prices, a disastrous January jobs reports, Japan, weather problems, etc… — that consumption has held up as well as it has.

We’ve written in the past about the key role of the consumer in leading the economy out of the slump since the middle of last year. But we’ve also been careful to say that it can’t be a consumption-led recovery forever. At some point, either a rebalancing-driven surge in exports or renewed business investment would probably have to play a bigger role.

Since incomes have continued to increase as well, at least there’s the prospect that consumption could accelerate again if things start settling down a bit, and especially if we start seeing more jobs growth. But yeah, that’s a huge if.

When the economic recovery was gathering pace at the end of last year, you would often hear pundits describe it as “fragile”, or say that it still faced “headwinds” and remained “vulnerable to further shocks” (bonus points for including the word “exogenous”).

Well, we’ve had a few such shocks, and those headwinds are still here. It shouldn’t be a surprise, then, that despite a better outlook than in mid-2010, the recovery is sputtering — or that economy watchers need to rejigger their forecasts now and again to adjust for new developments.

As for consumer spending, maybe it’s just beginning a deep-rooted slump, or maybe a reversal of the fourth quarter was inevitable and we’re just being too short-termist in our thinking.

There are all kinds of complications involved here, and we simply remain undecided about a lot of it.

That’s something we seem to be saying a lot these days.