March 2013 Personal Income and Outlays, and Consumer Debt

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Bureau of Economic Analysis (BEA) data showed that personal income increased $30.9 billion (0.2 percent) and disposable personal income (DPI) increased $20.7 billion (0.2 percent) in March. Personal consumption expenditures (PCE) increased $21.0 billion (0.2 percent). Real (inflation-adjusted) DPI increased 0.3 percent while real PCE increased 0.3 percent.

Most analysts we follow found the report unremarkable (see this and this). The increase in spending, although the smallest gain in three months, exceeded expectations of 0.1 percent. The realization that consumers were more cautious spenders in March, and income growth also softened, reinforced the impression the U.S. economy slowed as the spring began. “Consumers are struggling to cope with slow income growth and higher taxes this year even as inflation pressures have eased,” said senior economist Eugenio Aleman of Wells Fargo. Trends in personal income excluding government transfers are particularly disconcerting.

ZeroHedge noted an anomaly in the DPI and PCE data: “Spending on total goods (including durables, already known as being quite abysmal, and non-durable), dropped by $32.8 billion in nominal dollars. What was the offset? Why a massive surge in consumption expenditures on services[; spending on services] rose by $53.8 billion, which -- absent the spending aberration for September 11, 2001 (reversed the following month) -- was the biggest monthly increase on record! What drove this record services spending spree is anyone's guess.” 

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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. Although the rising trend in nominal personal income is apparently still in place, real per-capita income has stagnated well below the recessionary peak. 

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Total consumer debt outstanding (CDO) rose by a seasonally adjusted $8.0 billion (+3.4 percent annualized) in March; expectations were for a $15.6 billion increase. Revolving (mostly credit card) debt declined by $1.7 billion (-2.4 percent annualized) -- the biggest drop since December; however, non-revolving debt increased by $9.7 billion (+5.9 percent annualized). 

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In March, the total non-seasonally adjusted change in non-revolving debt amounted to $4.9 billion relative to February. Federal student loans grew during the month by $3.9 billion, or 79 percent of the change in that category. Relative to March 2012, federal student loans contributed 70 percent of the total growth in consumer credit outstanding.

The incredible expansion of student loan debt may be reaching its limits as default rates soar. According to the Wall Street Journal (article in the clear here), “Sallie Mae, the nation's largest non-government student lender just cancelled a $225 million debt offering as investors decided they simply were not getting paid enough for risk -- amid rising student loan defaults.”

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.