Friday, June 30, 2023

Real income continues to set records, while real spending and real total sales falter


 - by New Deal democrat

Real personal spending faltered in May, and real total sales continued to falter in April, as of this morning’s report; while real personal income continued to be aided by the big decline in gas prices that started a year ago.

Let me start with the good news.

Real personal income less government transfer receipts is one of the important coincident metrics watched by the NBER. And it rose 0.3% in May to a new record high:

It is 2.0% higher than before the pandemic, and 1.1% higher than last year in May when gas prices were approaching $5/gallon. 

Real disposable personal income (not shown) also rose 0.3%.  And real personal income by itself (blue in the graph below) also rose 0.3%, and is 3.7% higher than it was just before the pandemic.

Now let me turn to the bad (or just ‘meh’) news. 

Real personal spending (red above) declined less than -0.1%, rounding to unchanged. Although it is 8.1% higher than just before the pandemic, it is up only 0.1% in the four months since January. On a YoY basis, it is still up 1.1%, but in the 50 years before the pandemic, such a YoY showing usually happened only as the economy was entering a recession:

Further, remember that real personal spending on services has a long history of rising many months into, and sometimes all the way through, recessions (and indeed was up another 0.2% in May to another record high). But real personal spending on goods, similar to real retail sales, tends to be a short leading indicator, and in particular a short leading indicator for employment growth.

And there, the news was not good, as real spending declined -0.4% for the month, and is down -0.9% since its recent peak in January.

Finally, the personal savings rate increased 0.3% to 4.6%, tied for an 18 month high with March. Here is the long-term historical record:

The savings rate tends to increase in the months before recessions as consumers get more cautious.

The bad news continues in the other metric updated this morning, real total sales (including manufacturing, wholesale, and retail sales) for April, which declined -0.2%, and is down -1.6% from its January peak:

So to recap: all of the real personal income metrics improved, in some cases to new all time highs. Barring revisions, this will likely be enough, along with payroll growth, to signal that the economic expansion is still continuing. This also reflects the continued tailwind from lower gas prices - a tailwind that is very likely to disappear over the course of the next six months. But total real spending, real spending on goods, the personal savings rate, and real total business sales were all unchanged or worse. Several of these are short leading or coincident indicators of recessions.