An hour before the start of the new trading day, investors received the latest report on the U.S. economy when the Department of Commerce released data on personal spending and consumption for the month of July. The figures, though in the ballpark of what the consensus had been expecting, were a bit disappointing.
Specifically, the government reported that personal income climbed just 0.1% in July, compared to advances of 0.3% in each of the preceding two months. Meanwhile, personal consumption expenditures for the same period also increased 0.1%, a sharp decline from the 0.6% growth recorded in June. If these trends were to persist over the remaining months of this year, which would include the all-important holiday showing season for retailers, it would likely be a problem for an economy that is still growing at an uneven pace right now; earlier this week we received a discouraging report on durable goods orders. The consumer sector—which accounts for roughly two-thirds of the nation’s economic output—is being counted on heavily to keep the economy moving forward in the months ahead, especially with some questions arising about the sustainability of the ongoing housing recovery if lending rates were to continue rising.
Thus, we do look ahead with a bit of a cautious eye. While job creation appears to be trending higher (we will get the latest monthly figures on employment and unemployment next Friday), the recent rise in energy costs could still stifle disposable income in the coming months. The amount of disposable income available to individuals and families could be threatened by the higher energy prices. If consumers are forced to pay increased prices at the gas pump, it could really erode their disposable income and likely spending on big-ticket items this fall. One silver lining in the latest report, though, was that real disposable income increased 0.2% in July. But as we noted, higher energy prices, which are in play right now as tensions mount in the fractious Middle East, may continue to make a dent in the wallets of individuals. If this trend persists, we don’t foresee a notable pickup in consumer spending in the months ahead.
We also would be remiss if we did not point out that wages and salaries, which are major contributors to personal income, were notably lower in the month of July. Specifically, private wages and salaries decreased $15.3 billion last month, compared to an increase of $31.3 billion in June. The primary culprits were declines of $4.2 billion, $3.7 billion, and $11.2 billion in goods-producing, manufacturing, and services-producing payrolls, respectively. These setbacks speak volumes about the importance of an improvement in the labor market going forward to the overall health of the economy and the consumer, which, as noted, accounts for a huge portion of the nation’s output.
All in all, this latest report on personal income and spending was far from uplifting. It, along with heightened concerns about energy prices and the Federal Reserve’s likely cutback in its highly accommodative monetary policies, raise the question as to just how much money the consumer is likely to have at its disposal over the coming months.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.