Comerica Economic Weekly

The personal income and spending report for February delivered some good news supportive of 2012Q1 real GDP growth as consumer spending increased by 0.5 percent after inflation. The not so good news is that real disposable income (after taxes and inflation) fell by 0.1 percent, after declining by 0.2 percent in January.  The strong consumer spending numbers for February coincide with unit auto sales at a 15 million unit annual rate. Non-auto retail sales reports are also showing strength. Consumers are feeling more confident. The University of Michigan consumer sentiment index increased to 76.2 in February, despite higher gasoline prices. The consumer sentiment index has increased every month since last September.  Payroll job growth has been strong over the last three months, averaging 245,000 net new jobs per month. Also, household balance sheets are much less leveraged than they were three years ago. The combination of job growth, more confidence and cleaner balance sheets has allowed consumers to unleash pent up demand, and that is a good thing for GDP growth. However, the trend in real disposable income is not so rosy, having done barely better than a flat line for the past year. This implies that increases to spending are coming at the expense of savings. The personal saving rate fell in February to 3.7 percent, its lowest level since August 2009. A declining saving rate further implies that consumer spending may be more constrained in the months ahead. Another interpretation of the data, however, suggests that income and GDP are undercounted now and will likely be revised up later. Perhaps both stories are true. Consumers are feeling more comfortable unleashing their pent up demand, but are still somewhat constrained in how far they can go in that direction, and overall economic growth might be a little stronger than what some of the higher level statistics like GDP and personal income are indicating. Data revisions through the business cycles are part of what keeps economics interesting (or insert your favorite adjective here).

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