- 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 for March was the first that represented activity including at least part of the Iran war oil shock.
In March, nominally personal spending rose 0.9%, while personal income rose 0.6%. Since the PCE deflator increased 0.7%, however, spending was only higher by 0.2%, while real income declined by -0.1%, the second decline in a row, taking the absolute number down to its lowest since last July:
Further, on a YoY% basis, real income was only up 0.2%. Aside from months where it was affected by tax law or stimulus programs, such a low increase has only happened during recessions. Real spending was up 2.1%, the lowest in over two years except for December:
Once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions, real personal income also declined less than -0.1% to the lowest level since last July:
On a YoY basis, this was now down -0.1%. Again, aside from comparisons distorted by tax law changes or stimulus programs, this has only happened during recessions:
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 March, real spending on services rose only 0.1%, but real spending on goods rose 0.6%, and on durable goods rose 0.9%. The below graph shows the post-pandemic record, normed to 100 as of March of last year:
Keep in mind that gasoline is a good, explaining the substantial increase in goods spending in March. Nevertheless, on a YoY basis real spending on goods was only up 0.7% and real spending on durable goods *declined* -0.6%:
Once again, this last number was recessionary.
The Iran war came a-callin’ for PCE inflation, as the deflator increased 0.7%, causing YoY PCE inflation to rise to 3.5%:
Meanwhile, the personal saving rate - i.e., the portion of income left over after spending, declined -0.3% further in March, to 3.6%, the lowest such rate in over three years, and a low rate which has only been exceeded during the 2005-07 period and during 2022:
Basically, in order to deal with the spike in gas prices, consumes got further out over their skis, leaving them vulnerable to any further shock, but explaining why the economy did not contract last month, as typically sharp retrenching by consumers is also 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 increased 0.6% in February to another 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.
There are two very big trends in this data. First, the consumer is in real trouble, as real income is faltering, as is spending on goods (ex-energy), and in particular on durable goods. As I noted above, this is recessionary, although consumers have not (yet) started to retrench. On the other hand, manufacturing — likely aided by AI data center construction, and as of March likely also aided by oil company profits — continues to Boom. It is likely only this that has kept the economy technically out of recession.
