February results showed that flat income growth caused consumers to tap into their savings to finance purchases of goods and services, which were up only 0.3% MoM. This means that personal savings decreased. These are negative indicators for the economy.
According to the release by the Bureau of Economic Analysis:
Personal income increased $1.2 billion, or less than 0.1 percent, and disposable personal income (DPI) increased $1.6 billion, or less than 0.1 percent, in February …
Personal consumption expenditures (PCE) increased $34.7 billion, or 0.3 percent. In January, personal income increased $30.4 billion, or 0.3 percent, DPI decreased $26.0 billion, or 0.2 percent, and PCE increased $38.5 billion, or 0.4 percent, based on revised estimates.
Real disposable income [i.e., adjusted for inflation] increased less than 0.1 percent in February, in contrast to a decrease of 0.4 percent in January. Real PCE increased 0.3 percent, compared with an increase of 0.2 percent.
Of all the economic analysts that I follow (about a half dozen) only David Rosenberg got the analysis of these numbers right, which is a roundabout way of saying that my analysis coincides with his analysis. My thesis as most of my readers know is that there are long-term trends in the economy and significant among those is increased savings as a result of financial uncertainty and the lack of sufficient savings by Boomers for retirement.
If savings are a main motivation of consumers, and because wages are flat to declining, then a reduction in savings to fund consumer purchases is not a good thing for the economy. It means that as soon as consumers feel they have sufficient income to continue to save, they will do so, and PCE (personal consumption expenditures) will remain flat for an extended period of time.
Look at what drove PCE in February. The largest component was purchases of non-durable goods which is food and clothing (up 0.9%). Without the component of food and fuel (which has been rising in price), PCE was flat. People need food and clothing. And they have to drive and heat their homes. These aren’t exactly elective purchases. The fact that they are dipping into savings is not healthy organic growth of PCE.
One could say that rising savings are healthy for the economy, rather than the Keynesian “liquidity trap” scare tactics. Keynesians and most economists confuse money (fiat money in our case) with wealth. Wealth is only created from what is called “real savings” which means money derived from productive activity which is saved and not consumed. The more real savings we have, the quicker the economy will recover because real savings are the capital needed to fund future economic activity. If it were any other way, then countries like Zimbabwe would be wealthy. You can’t print your way out of a recession/depression.
The fact that people must not spend in order to save allows the economy to repair itself as unprofitable businesses shed debt and bad assets or go broke, and make way for profitable businesses to lead us out of the business cycle.
Thus a decline in savings in order to buy the basics is not good for the economy. What we can look forward to is reduced PCE in H2 because there is still pressure on wages as companies remain reluctant to hire new workers until they see consumer demand pick up. At this point, it appears that companies can’t squeeze much more productivity out of the system, so wages and productivity will remain stagnant.
Another thing. Look at this article from Bloomberg on the BEA release:
Consumer spending in the U.S. rose in February for a fifth consecutive month, a rebound that will require gains in employment to be sustained. …
Purchases of non-durable goods increased 0.9 percent, the biggest gain since January 2009, as Americans stocked up on groceries and splurged on clothing. Spending on services, which account for almost 60 percent of all outlays, increased 0.3 percent. …
This is part of the problem in trying to make sense out of these numbers. The article says “Americans stocked up on groceries and splurged on clothing.” The implication is that consumers bought like crazy. They should have said: “Americans had to dip into savings to buy the necessities of life, food and clothing.” Bloomberg is cheer leading instead of reporting the news.