Consumers Spend Less, Save More…Preparing to Buy Houses?
- U.S. Personal Income increased by 0.4 percent in February, boosted by dividends.
- After accounting for inflation and taxes, Real Disposable Personal Income gained 0.2 percent.
- Real Personal Consumption Expenditures decreased by 0.1 percent in February.
- The Pending Home Sales Index for February increased by 3.1 percent.
Consumer spending accounts for two-thirds of GDP so we watch that closely. When it behaves out of character, that challenges our assumptions about GDP. Now is one of those times when real consumer spending is going off script, challenging our assumptions. Despite solid real income growth this winter, real consumer spending has been weak. Real disposable personal income has increased by an average of 0.5 percent over December, January and February. Meanwhile, the monthly change in real consumer spending was just 0.1 percent in December, 0.2 percent in January and -0.1 percent in February. Put another way, real disposable personal income increased by about $17 billion from November through February (non-annualized), while real consumer spending increased by a minimal $2 billion. This implies that we have had a large increase in the personal saving rate. Indeed we see that the personal saving rate has jumped from a recent low of 4.4 percent in November, to 5.8 percent in February. Large increases in the personal saving rate are often associated with real events, including a sudden cooling of overall economic activity, or the anticipation of a tax increase. That does not appear to be the case now as job growth over the winter has been very strong and taxes are stable. Indeed, with strong job growth we would expect consumers to be more confident about spending their income, however, recently they are less so. The income and spending data are not telling us why personal saving has ramped up. So we will go out on a limb and speculate about what might be going on with the saving rate. We observe that the personal saving rate was trending up from the beginning of 2008 through the end of 2012 (see graph). Federal taxes were increased in January 2013, and the saving rate reset from a high 10.5 percent in December 2012 to 4.5 percent in January 2013. There was no clear trend in the saving rate from its value of 4.5 January 2013 to 4.4 percent in November 2014. Now, with another tax year behind us, households are getting used to a heavier tax burden, and may be starting to resume their upward trend in savings. A less materialistic and more debt averse consumer may require us to be more conservative in our outlook for consumer spending in the years ahead. This in turn argues for a more conservative view on real GDP growth.
On the other hand, perhaps households are saving up for down payments on houses. The millennials have been late to the housing game, burdened by a weak job market and heavy student debt. Housing markets are due for a break out. In February we saw new home sales surge by 7.8 percent despite bad weather. The February pending Home Sales Index increased by 3.1 percent, suggesting we could see gains in existing homes sales in March. Stay tuned.
Market Reaction: U.S. equity markets opened with gains. The yield on the 10-year Treasury bond is steady at 1.95 percent. NYMEX crude is down to $48.34/barrel. Natural gas futures are down to $2.65/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Personal Income 033015.