Consumption Outstrips Incomes in March

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According to a report by the Bureau of Economic Analysis,both personal incomes and outlays rose in March. However, the increase in spending outstripped the increase in disposable incomes by over 81 percent:

"Personal income increased $36.0 billion, or 0.3 percent, and disposable personal income (DPI) increased $32.3 billion, or 0.3 percent, in March, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $58.6 billion, or 0.6 percent. In February, personal income increased $7.1 billion, or 0.1 percent, DPI increased $4.3 billion, or less than 0.1 percent, and PCE increased $56.4 billion, or 0.5 percent, based on revised estimates.

"Real disposable income increased 0.2 percent in March, compared with an increase of less than 0.1 percent in February. Real PCE increased 0.5 percent, the same increase as in February."

Although PCE and DPI are increasing on a year-over-year basis, both of those increases are well below their historical averages of, respectively, 7.2 and 7.1 percent.

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Spending rose, at least in part, because of the unprecedented amount of federal transfer payments received by households. Since the recession began in December 2007, federal transfer payments (defined in this case as only federal unemployment insurance benefits and “other” government social benefits to persons) have jumped from 5.3 percent of total personal income to 7.5 percent – the highest percentage since 1947.

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Given the rise in PCE, it follows that retail sales also jumped higher. The graph above and table below contain the Census Bureau’s revised figures for March – which differ only slightly from the “advance” versions posted in April 19’s blog entry Retail Sales Increased in March: The Question is “Why?” The comments made in the posting still apply.

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As we have frequently stressed, the current gradual convergence between incomes and spending is unsustainable. Either incomes need to rise or spending will need to be cut for the U.S. economy to revert back to a more healthy state. In light of the myriad other hurdles facing the U.S. consumer – particularly our expectations of waning federal stimulus after 3Q2010 and rising interest rates – we think the most likely outcome is for spending to eventually retrench, along with the overall economy.