- by New Deal democrat
This morning’s personal income and spending report for April showed us a consumer who is teetering on the very edge of recession, while the production side of the economy continued its elevated AI-related growth.
To repeat my usual introduction, 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.
In April, nominally personal spending rose 0.5%, while personal income was unchanged. Since the PCE deflator increased 0.4%, however, spending was only higher by 0.1%, while real income declined by -0.4%, the third decline in a row and the fifth decline in the past seven months, taking the absolute number down to its lowest since February of last year:
Further, on a YoY% basis, real spending was up 2.1%, the lowest such comparion in over two years except for last December. But worse, real income actually declined -1.2% YoY:
Importantly, the long term historical graph of real income YoY shows that outside of comparisons with stimulus or tax law change months, real income has only been negative YoY during or in the immediate aftermath of recessions:
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 its lowest level since late 2024, and -1.2% below its peak level last September:
Outside of brief declines of no longer than four months, and during 2022, a -1% or greater decline from a peak has only happened leading up to or during recessions (note log scale for better clarity):
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 (gold in the graph below) turns down in advance of recessions, and in particular spending on durable goods (red), 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 already been flashing red warning signals for a number of months. In April, real spending on services rose 0.2%, but real spending on goods declined -0.1%, and on durable goods declined -0.6%. The below graph shows the post-pandemic record, normed to 100 as of March of last year:
On a YoY basis real spending on goods was up 1.2% but real spending on durable goods was down -0.1%. The trend has been weakening for over a year, and for the past few months has been the lowest since 2022:
A longer term graph of the same shows that such weak numbers only happened during the Great Recession and also in early 2019, which was close to a recession as well:
The Iran war showed up in PCE inflation, as the deflator increased 0.4%, causing YoY PCE inflation to rise to 3.8%, the highest since May of 2023:
Meanwhile, the personal saving rate - i.e., the portion of income left over after spending, declined a sharp -0.6% to 2.6%, the lowest such rate since June 2022, which has only been exceeded during the 2005-07 period and during 2022:
This is the second month in a row in which it appears that, in order to deal with the spike in gas prices, consumes got further out over their skis, leaving them vulnerable to any further shock. Typically sharp retrenching by consumers as demonstrated by an increase in the saving rate is something that happens just before the start of a recession.
Finally, 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 declined -0.3% in March from their all-time high in February:
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, which in turn is tied to AI data center construction.
To sum up, April’s personal income and spending report amplified two very big trends which have been apparent in this data since late last year. First, the average consumer is only keeping their proverbial head above water by digging into their credit limits, as their real income has declined by recessionary margins. This is also manifesting by a decline in spending on goods, and especially durable goods.
There are only two things keeping this from having brought about a recession already. The first is that consumers have not yet started to retrench by increasing savings. Second, the AI data center construction boom (or bubble), likely also aided by oil company profits, is driving an increase in manufacturing production.
By such a narrow thread is the entire economy hanging.