June 2010 Personal Income and Outlays, Retail Sales and Consumer Debt: Stuck in Neutral

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Disposable personal income (DPI) increased $5.1 billion (essentially unchanged on a percentage basis) in June, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $2.9 billion (also essentially unchanged). Although still in positive territory, year-over-year growth in both DPI and PCE has been trending lower since March.

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Given the fall-off in PCE, it is not surprising that retail sales also retreated in June. The decline was particularly noticeable in the motor vehicles category. Food service sales were again the only category reporting an increase in June.

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PCE is falling partly because the personal saving rate is rising; consumers saved 6.4 percent of after-tax income in June, the highest reading in nearly a year. The savings rate is now about three times the 2.1 percent average for all of 2007, before the recession began. In addition, they are paying down debt (or convincing lenders to write off what is uncollectible). Consumer debt declined by $9.1 billion in June (-4.5 percent SAAR), 80 percent of which was in the revolving credit category (e.g., credit cards).

As Joshua Shapiro, chief U.S. economist at MFR Inc., explained: “It is important to understand that recent consumption gains have been substantially fueled by higher government transfer payments (a source of income that due to its nature is 100 percent spent) and by impetus from a short-lived bounce in home sales spurred by the now defunct homebuyer tax credit. Neither of these is a sustainable source of spending increases, which ultimately must be financed by private sector job growth and consequent gains in wages and salaries.”

Ryan Sweet, a senior economist at Moody’s Economy.com. summed up our view of the near future very succinctly when saying, “Consumers are still hunkered down. The second half of this year we’re going to see slower spending.”