Monday, May 3, 2010

Not Sustainable

The WSJ details:

U.S. consumer spending rose twice as fast as income in March as saving dropped to its lowest level in 18 months and a closely watched indicator of inflation remained stable.

Personal income rose 0.3% in March as a weak labor market continued to keep a lid on wage growth, the Commerce Department said Monday.

Meanwhile, consumer spending -- which accounts for 70% of demand in the U.S. economy -- increased by 0.6% from the prior month, likely lifted by government efforts to spur economic growth.

With income growth sluggish, U.S. consumers slowed their pace of saving in March. Americans in March saved $303.9 billion as the national saving rate slid to 2.7% from 3.0% the previous month. The saving rate is at its lowest level since September 2008.
Below is a chart of the cumulative change in the largest sub-component of personal income, compensation, in real terms over the past three years.

And a chart of the same data, but in year over year terms since 1990.

The above disconnect occurred for a number of reasons (less savings, transfer payments [i.e. unemployment], return on financial assets, borrowing [commercial bank credit is down due to defaults, but net borrowing is actually up], and missed mortgage payments [some evidence that people are spending what "should be" their mortgage]).

None of which are sustainable.

As a result, look for consumption to slow unless wages and actual income levels begin to rise.

Source: BEA