The first of these areas is consumer spending. As I noted in last week's GDP report, PCEs have been increasing in the 1.5% - 2.6% range for the last five quarters. While this indicates consumers have been buying more and more goods and services, this pace is below that of previous expansions. This leads to the question, what is holding consumers back from increasing their buying?
The primary reason is the jobs market, which is contributing to lower consumer sentiment:
Lower sentiment means depressed consumer activity. As such, the lower PCEs should not be considered abnormal.
In addition, we've seen a slow growth in real disposable personal income, largely as a result of high unemployment (high unemployment means lower bargaining power for employees, which lowers upward wage pressure in the market):
Lower DPI growth also leads to lower PCEs.
So, we have a depressed consumer who's real pay is not growing. As such, he's been spending but is very price sensitive and is always looking for deals.
However, we also have a consumer who is saving a lot more:
This means there is a pool of cash consumers could bring into the market from the sidelines in the right situation. In addition, the consumer has been paying down debt:
The decreasing financial obligations ratio indicates consumers will be able to borrow more if they have a reason. I believe that reason is an improved jobs markets -- one where the consumer sees the possibility of real and sustained job gains. That means we need to see at least 3-5 months of meaningful job growth -- say, in the 150,000-200,000 month range.
