- by New Deal democrat
Personal income and spending are among the most important monthly indicators of all, because they give us a detailed look at consumption by the broad range of American households. And since consumption leads employment, they also give us an idea of what is likely to happen with regard to jobs in the near future. This morning’s data was for February, so it is still several weeks later than usual. Keep in mind that this represents activity before the Iran war and its oil price shock.
In February, nominally personal spending rose 0.5%, but personal income declined even nominally, by -0.1%. Since the PCE deflator increased 0.4%, real spending was only higher by 0.1%, while real income declined, after rounding, by -0.4%. Here is what they look like since the pandemic:
Note that real personal income has been flattening for almost a year, and February’s number was the lowest since last June.
Further, on a YoY% basis, both real income and spending have been decelerating since late 2024, income by more than spending:
Once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions, real personal income also declined -0.4% to the lowest level since last July:
On a YoY basis, this was up 0.5%. With only three exceptions — 2013 (which was an artifact of a change in Social Security withholding), 2022, and one month in 1995 — such a low rate has only happened during recessions:
In 2022, the economy was saved by the hurricane strength tailwind of deflating producer prices, which enabled a continued Boom in consumer spending. Needless to say, with the war with Iran that is not going to happen now. But despite the 0.4% increase in PCE prices for the month, the YoY% change remained at 2.8%:
Whether this suggests that the slowly increasing YoY trend over the pat 12 months will continue, or is flattening, is not at all clear.
Another important component of the data is spending on goods, and in particular durable goods, which is a leading indicator. Historically, the pattern has been that real spending on goods (red in the graph below) turns down in advance of recessions, and in particular spending on durable goods (orange), which tends to turn down first. Real spending on services (blue) has tended to rise even during all but the most prolonged or deep recessions. These have been flashing red warning signals.
In February, there was something of a rebound. Real spending on services rose only 0.1%, but real spending on goods rose 0.2%, and on durable goods rose 09%. But neither of the latter two measures fully reversed their January declines. The below graph shows the post-pandemic record, normed to 100 as of January of last year:
The trend in goods spending was flat all last year. To smooth out some of the noise, I have been tracking the three month average. That average was almost completely flat in the period from July through December, peaking in November, and as of February is at a seven month low.
The updating of the PCE deflator also allows for an update to another important coincident indicator used by the NBER to consider whether the economy is in recession or not; namely, real manufacturing and trade sales, which is delayed by one additional month. These increased 0.4% in January to a new all-time high:
This is of a piece with the recent rebound in manufacturing data we have seen in things like durable and capital goods orders as well as manufacturing production.
Finally, the personal saving rate - i.e., the portion of income left over after spending, declined in February back to 4.0% from its 4.5% reading in January:
Paradoxically, this is relatively good news, because a sharp retrenching by consumers is also something that typically happens just before the start of a recession. It looked like one might have been beginning in January, so February’s reversal means that consumers were a little more confident.
When we put all this together, we get a mixed picture. Real income has been stalling out, and declined in February, both before and after taking government transfer payments into account. So have real spending on goods and in particular durable goods. All of these are recessionary or near-recessionary. But consumers did not retrench, and the rebound in manufacturing sales continued in January.
But to reiterate, all of this predated the oil price spike in March. We will find out just how much that impacted consumers with tomorrow’s CPI report.
