Consumer Spending Is Poised For A Major Slowdown

Daily Forex Fundamentals | Written by Wachovia Corporation | Aug 29 08 14:19 GMT |

Personal income fell 0.7 percent in July but most of that drop reflects a payback from the Economic Stimulus checks. Disposable income fell an even-larger 1.1 percent. Wages and salaries grew 0.3 percent, which is in line with recent months. Personal spending rose 0.2 percent but declined 0.4 percent after adjusting for inflation. Sorting Out The Impact Of The Tax Cuts The tax rebates have largely worked their way through the income and spending data. The net result has been increased volatility in personal income and an ever-so-slight boost in consumer spending. Personal income leapt 1.8 percent in May and disposable income surged at a 5.7 percent pace. The past two months have seen a payback, with personal income rising just 0.1 percent in June and declining 0.7 percent this past month. After-tax income has been even weaker, tumbling at a 1.9 percent pace in June and a 1.1 percent pace in July. When you net it all out, personal income grew at a 7.8 percent pace over the past three months and after tax income surged at a 12.2 percent pace. Given the boost to income, spending did not receive anywhere near the boost that was hoped for. The only gain was in May and that was just 0.3 percent. Spending fell 0.1 percent in June and declined another 0.4 percent this past month. Apparently, a large portion of the extra money provided by the rebate checks was eaten up by higher prices at the grocery store or siphoned away by higher prices at the gas pump. While the rebate checks did not provide a significant boost to spending, they probably did help avoid larger drops in spending that would have likely occurred due to the mid-summer spike in energy prices. Wages & Salaries Give A Clearer Picture Of Income Trends Now that the rebate checks are behind us, income and spending will be driven by the fundamentals, which are notably weaker than they were earlier in the year. Nonfarm employment has fallen for seven consecutive months and wage and salary growth has slowed to just a 3.0 percent pace over the past three months. Wage and salary growth normally sets the pace for consumer spending and we can expect nominal consumer expenditures to move back to a 3 to 3.5 percent pace. Since inflation is running faster than that, inflation adjusted outlays will likely drop. Our August macro forecast has real personal consumption expenditures declining at a 0.7 percent annual rate during both the third and fourth quarters. The latest data are in line with this forecast. Inflation Should Moderate In August The PCE deflator rose 0.6 percent in July and is currently up 4.5 percent over the past year. Prices increased only half that much after excluding food and energy prices but is still up a problematic 2.4 percent over the past year. Gasoline prices plummeted in August, which should provide some near-term relief to the inflation figures and real incomes. Further declines in energy prices would improve the second half outlook, but with storms brewing in the Caribbean and Atlantic it is way too soon to bank on that. Wachovia Corporation http://www.wachovia.com Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.