May 2010 Personal Income and Outlays, Retail Sales, Consumer Debt and Household Net Worth: Income Gains Outpace Spending

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Disposable personal income (DPI) increased $49.0 billion (0.4 percent) between April and May while personal consumption expenditures (PCE) increased $24.4 billion (0.2 percent), according to the Bureau of Economic Analysis. Those changes followed on the heels of a 0.6 percent increase in DPI and 0.1 percent increase in PCE during April. May’s larger increase in DPI (relative to PCE) allowed the personal saving rate to rise to 4 percent -- above the average of 2.8 percent seen since 2000, but still well below the average of 9.3 percent typical up until the mid-1980s.

"The consumer is finally starting to see some positive wage gains," said Omair Sharif, an economist at RBS Securities Inc. "Consumer spending isn't going to propel the recovery forward, but it should be more than enough to sustain it. "

Interestingly, although DPI rose more quickly on a month-over-month basis in May than did PCE, growth in DPI is slowing on an annual percentage change even while the PCE growth rate is picking up. "Consumers are less cautious than they were previously," Robert Niblock, CEO at Lowe's Cos., the second-largest home-improvement chain. "But they still know that we're still not out of the woods yet."

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Although PCE may have increased in May, it was not because of higher retail sales. In fact, total retail sales declined 1.2 percent in May -- the first drop in eight months. Only food service sales were spared, but even they were essentially flat.

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Joel Naroff, president of Naroff Economics believes the 1.2 percent drop in May’s retail sales shows the consumer sector remains sluggish. “Maybe the consumer has not decided that spending money is a good idea,” Naroff wrote in a note to clients. “This was a weak report that points to more sluggish consumer spending than many expected. But it also supports my view that GDP growth will be modest, and that includes the current quarter.” The problem isn’t that people are staying away from malls, Naroff said. It’s that they aren’t spending money once they get there.

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Consumers appear to be venturing very tentatively back into the credit pool, although primarily for bigger-ticket purchases. Consumer credit increased at a seasonally adjusted and annualized (SAAR) monthly rate of 0.5 percent in April 2010. Revolving credit (e.g., credit cards) decreased by 12 percent (SAAR), while nonrevolving credit increased by 7 percent (SAAR).
Federal Reserve statistics show that total credit card debt was down about 12.5 percent from the mid-2008 peak, to $838 billion in April. Most observers attribute the improvement to consumers paring back spending and focusing on paying down debt. But a good portion of that drop -- some estimate two-thirds or more -- came from charge-offs (balances written off as uncollectible). Other consumers may be benefiting from credit card regulations that took effect in February. By constraining banks’ ability to raise interest rates and fees, the rules are making it easier for cash-strapped consumers to keep up with their payments.

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Because of the combination of gradually rising incomes and consumers’ discipline, household net worth is on the rebound (to $54.6 trillion, a 2.0 percent rise from 4Q2009). The nominal value of household assets rose for a fourth consecutive quarter in 1Q2010, while liabilities shrank for a sixth straight quarter.

The take-home message is that consumers appear to be attempting to rebuild their own balance sheets and thus remain cautious about increasing spending. Since approximately 70 percent of U.S. GDP is related to consumer spending, conservatism on their part -- while necessary -- means economic activity is likely to remain constrained, and could quickly go into reverse if expectations of future conditions darken appreciably.