The Truth About Consumer Spending Reports

By Jeff Harding

If one just read the headlines from today’s Wall Street Journal or Bloomberg.com, one would assume that the Obama Administration’s stimulus package is a resounding success. But a close review of the numbers reveals exactly the opposite. I talked about this on Wednesday in my article on Why the Fed Didn’t (and won’t) Raise Interest Rates, saying that the consumer spending report on Friday would be interesting. It was.

First, the savings rate, at 6.9% was the largest increase since 1993, and the biggest dollar amount since 1959 when they first started tracking this number. It means that people are repairing their personal balance sheets in the face of an uncertain future. This is a good thing for the economy because it will provide the capital for future growth.

Second, real personal consumption expenditures (consumer spending adjusted for inflation) increased 0.3% over April when it decreased by 0.1%. According to the Bureau of Economic Analysis the expenditures were largely related to auto sales as dealers struggle to cut inventory. People like deals.

Third, personal income increased 1.4% and disposable personal income (after tax) increased 1.6%. The BEA reported that the increases were due to tax cuts and social security payments:

The lion’s share (94.3%) of the increase in income came from one-time increases of $250 per eligible recipient of social security, supplemental security, veterans benefits, and railroad retirement benefits. The $13.1 billion of these transfers boosted May income by about $158 billion (annualized). These transfers are not recurring so incomes will fall by a like amount in June. Spending from this actual $13.1 billion is likely to be spread out over several months or even years if recipients use the proceeds to increase saving or reduce debt. Nomura Global Economics

Fourth, private wages and salaries cratered in May:

Private wage and salary disbursements decreased $12.4 billion in May, compared with a decrease of $0.7 billion in April. Goods-producing industries’ payrolls decreased $12.9 billion, compared with a decrease of $12.2 billion; manufacturing payrolls decreased $9.8 billion, compared with a decrease of $4.9 billion. Services-producing industries’ payrolls increased $0.5 billion, compared with an increase of $11.5 billion. Government wage and salary disbursements increased $3.9 billion, compared with an increase of $5.7 billion [JH-here’s a growth industry].

The implication of these numbers is that they are big:

… yesterday’s revised GDP data show that during the first quarter, aggregate wage and salary disbursements fell on a year-over-year basis. While this may not seem much of a surprise, this is the first over-the-year decline in wage and salary disbursements since the second quarter of 1958. While the rate of job losses appears to have moderated, employment is nonetheless still declining, as are aggregate hours and aggregate labor earnings. Richard F. Moody, Forward Capital

Yet, Bloomberg reads the same data and reports:

Consumer spending rose in May as benefits from the Obama administration’s stimulus plan spurred a jump in American incomes, a sign that efforts to revive the economy are starting to pay off.

The Wall Street Journal story leads off with:

The income of Americans soared in May because of the government’s economic stimulus, leading them to increase spending modestly and boost the saving rate to the highest in 15 years.

Ladies and gentlemen, they have absolutely no basis for these statements. It’s just cheer leading. These one-time stimuli are just that: one time and not lasting.