February 2013 Personal Income and Outlays, and Consumer Debt

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Bureau of Economic Analysis (BEA) data showed that personal income increased $143.2 billion (1.1 percent), and disposable personal income (DPI) increased $127.8 billion (1.1 percent) in February. Personal consumption expenditures (PCE) increased $77.2 billion (0.7 percent) -- the fastest rate in five months. Real (inflation-adjusted) DPI increased 0.7 percent while real PCE increased 0.3 percent.

“Despite the expiry of the payroll tax cut and higher gasoline prices, we’re now likely to see the fastest quarterly gain in real consumption in two years,” said Paul Ashworth, chief U.S. economist at Capital Economics.

“Yet the composition of spending also suggests some caution is in order,” MarketWatch’s Jeffrey Bartash noted. “Virtually all of the increase in spending in February, for example, was devoted to perishable items such as gasoline and food.” 

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We continue to be concerned about a couple of observations related to income and expenditures. First, the rate of year-over-year growth in both DPI and PCE has been slowing since July 2011. DPI growth peaked in February 2011 (we ignore December 2012 as an aberration), but PCE continued upward for another five months before it, too, rolled over. Second, although the rising trend in nominal personal income is apparently still in place, real per-capita income has stagnated well below the recessionary peak. As ZeroHedge pointed out recently, real per-capita disposable personal income in February was on par with levels first seen in December 2006.

When one realizes employment growth (especially in the private sector) is slowing and real wages are declining, the observations above come as no great shock; indeed they should be expected. Consumption cannot grow indefinitely if wages are not rising to support it; true, savings can be drawn down for a time, but -- with the U.S. saving rate once again near record-low levels in February -- we suspect consumers do not have much more equity “freeboard” left from which to draw. We conclude, then, that the economy is more fragile than is commonly understood. To quote analyst Lance Roberts, “As PCE goes -- so goes the economy.” While official data do not show another recession is necessarily imminent, the economy remains at risk. 

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Total consumer debt outstanding (CDO) rose by a seasonally adjusted $18.1 billion (+7.8 percent annualized) in February. Revolving (mostly credit card) debt increased by $0.5 billion (+0.8 percent annualized), while non-revolving debt increased by $17.6 billion (+10.9 percent annualized). 

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In February, the total non-seasonally adjusted change in non-revolving debt amounted to $2.5 billion. Since federal student loans grew by $4.2 billion, the other categories of non-revolving debt declined overall. Relative to February 2012, federal student loans contributed over 70 percent of the total growth in consumer credit outstanding.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.