Household Credit Is Spurring Growth, Threatened by Stalled Income and the Fiscal Cliff
- U.S. Personal Income increased by 0.1 percent nominally in August, matching the weak July gain.
- Real Disposable Personal Income fell by 0.3 percent, weighed down by inflation and taxes.
- Personal Consumption Expenditures were up in August by 0.5 percent before inflation.
- The PCE Price Index gained 0.4 percent in August, boosted by higher gasoline prices.
- New Orders for Durable Goods tumbled, down 13.2 percent in August, as commercial aircraft stalled.
- Initial Claims for Unemployment Insurance were down sharply, by 26,000 for the week ending Sept. 22.
- Real Gross Domestic Product growth for Q2 was revised down, to a 1.3 percent annualized rate.
Consumer spending, representing more than two-thirds of U.S. gross domestic product, remains disjointed, pulled in several directions at once. On one hand, we see increasing credit availability fueling a rebound in new and existing home sales and in auto sales. On the other hand, we see in today’s income and spending report for August that real disposable income (after taxes and inflation) was down 0.3 percent and August real consumer spending was nearly flat, rising just 0.1 percent after inflation. On the third hand, we see got-to-have-it items like the iPhone5 attracting substantial interest, likely paid for by increased credit card debt. This three-handed view suggests that consumers are able to satisfy pent up demand for big purchases, where credit is available, but are still feeling the strain of weak job creation and weak real wage gains, which may be limiting everyday purchases. Even before the August dip in real disposable income we had a weak 0.1 percent gain in July. If this trend in flat-to-declining real disposable income were to persist, eventually it would be a serious drag on spending, as credit availability would eventually contract as credit defaults increase. What might cause the current weak income trend to continue?… poor job growth, stalled wages and the Fiscal Cliff. The Fiscal Cliff would be a double hit to real disposable income, substantially increasing taxes while hurting job growth due to reduced federal spending. If the rebound in big-ticket, credit-fueled purchases is to continue, it will eventually need to be supported by ongoing real disposable income growth. That will require congressional action to reduce, eliminate or kick the Fiscal Cliff can down the road by early next year.
New orders for durable goods are on a rollercoaster ride, shaped by very lumpy commercial aircraft orders. Not that the aircraft are lumpy, but the spacing of orders is. In August, non-seasonally adjusted new orders for commercial aircraft were essentially zero, after hitting $18.6 billion in July. On a seasonally adjusted basis, new orders for commercial aircraft were down over one hundred percent (made possible only by the seasonal adjustment factors). Core durable goods orders (nondefense capital goods excluding aircraft) actually increased by 1.1 percent, so overall manufacturing conditions remain in the range of weakening-to-stable, and are not rapidly deteriorating. Weak global macroeconomic conditions are putting downward pressure on commercial aircraft orders, so the goose egg in August is not entirely inconsequential, but a rebound in commercial aircraft orders is inevitable. Initial claims for unemployment insurance fell by a substantial 26,000 for the week ending September 22, good news for overall labor market conditions. Real gross domestic product growth was revised down substantially in the third estimate, now down to just 1.3 percent annualized. Compared with the first estimate of 1.7 percent growth, all major categories, except government spending, are weaker.
Market Reaction: U.S. equities markets opened with losses, continuing to pull back from mid-September highs. U.S. Treasury yields are down at both ends of the yield curve, with the yield on 10-Year bonds also pulling back from mid-September highs. Oil is down to $91.73/barrel. The dollar is up against the euro and the yen.
Click here for a PDF version of the Comerica Economic Alert: Personal Income 092812.