April 2010 Personal Income and Outlays, and Retail Sales: Consumers “On the Wagon?”

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Growth in personal income outpaced changes in consumer spending during April. Personal incomes rose a seasonally adjusted 0.4% in April for the second straight month. Because of relatively flat price changes, nominal and real disposable incomes both rose 0.5% in April, the largest increase since May 2009. Consumer spending was flat in April. With incomes rising faster than spending, the personal savings rate jumped to 3.6% of disposable income (from 3.1% in March) – the highest savings rate since January.

The picture changes somewhat when looked at on a year-over-year basis, however. Incomes are 2.8 percent higher than a year earlier, while consumer spending is up 4.6 percent. Annual percentage increases in incomes have been smaller than spending since November 2009.

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As we indicated last month, government transfer payments are one of the reasons why incomes continue to rise despite a high unemployment rate. 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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Although overall personal consumption expenditures remained flat in April, the component that includes retail and food services sales increased 0.4 percent from the previous month – the seventh consecutive monthly increase – and 8.8 percent relative to April 2009.

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The bump in retail sales drew mixed reactions from the mainstream financial press. "No doubt, tax refunds supported the overall level of spending, but the core trend – no matter how you slice and dice it – looks solid," wrote Joseph Brusuelas of Brusuelas Analytics. But "[l]ooks can be deceiving,"countered Eric Green, an economist for TD Securities. "The sales pace in the first quarter was unsustainable and driven by a combination of government transfers including refunds and a drawdown in savings."

The Consumer Metrics Institute (CMI) recently warned that the behavior of its Personal Finance sub-index – which tracks transactions with default and foreclosure counseling services, among other items – may “portend a new round of credit challenges for consumers” or at least means “that some consumers are trying to be more aware of their legal options concerning their debt obligations.”

These pieces of anecdotal evidence support our contention that the consumer is a “weak reed” and should not be depended upon to drive an economic recovery.