Disposable Income And Consumer Spending Increase Yet Again

Looking for some positive economic news? Well, we have some. According to recent reports from the Bureau of Economic Analysis, personal consumption is up for the sixth consecutive month. Before you snicker at that, with your thoughts about American's turning back to their credit cards, it should also be noted that disposable income also rose for the third consecutive month. James Picerno from The Capital Spectator goes into further detail on the subject in his blog post below.

Disposable personal income (DPI) and personal consumption expenditures (PCE) increased in December, the Bureau of Economic Analysis reports. The update marks the sixth straight monthly rise in PCE and the third consecutive gain for DPI. In other words, if you’re looking for a reason to doubt the revival in consumer spending of late, you won't find it here.

Consumption’s 0.7% jump in December (the second-highest monthly gain in 2010) was largely driven by an acceleration in the purchases of goods rather than services. Goods-related PCE rose 1.2% in December, up from November’s 0.3% gain. Services-related PCE increased by a relatively spare 0.3% last month, about the same as November’s pace. Does the faster pace in goods-related purchases reflect growing consumer confidence? Or is it simply a temporary change bound up with the end-of-the-year holiday shopping?

One reason for thinking that sentiment may be improving for more than seasonal reasons can be found in the rise of private wages, which advanced 0.3% in December, up from November’s 0.1% rise. On an annual basis, private industry wage/salaries continue to increase at a 4% rate, the fastest in three years. That’s still well below the 6%-8% pace set back in 2005-2007, but apparently it’s high enough to keep consumer spending forging ahead.

Another sign that higher consumer spending is more than a glitch is the ongoing drop in the personal savings rate, measured as a percentage of DPI. Last month, the savings rate fell to 5.3% from 5.5% in November. In fact, the rate’s been dipping for most of the last six months. In June, the savings rate was 6.3%.

Still, the holiday factor can’t be ruled out just yet. As Bloomberg reports, “Retailers’ 2010 holiday sales jumped 5.5% for the best performance in five years, according to MasterCard Advisors’ SpendingPulse.” Impressive, but it's debatable if the holiday gains will endure or evaporate in January and beyond. It's tempting to assume that the good news will travel, but it's hard to take anything for granted when the labor market's rebound remains sluggish.

The outlook for the January payrolls report (scheduled for release on Friday, Feb. 4) calls for more of the same. Private non-farm job creation is expected to rise by a net 163,000 in the government’s update, based on the consensus forecast of economists via Briefing.com. That would be an improvement over December’s meek 113,000 advance, but we’re still a long way from a strong recovery in job creation. Until and if that changes, one can only wonder if the rebound in wages, which is essential for elevating consumer spending, can hold its ground.

This post was republished with permission from The Capital Spectator.

Foreclosures Provide Boost To Disposable Income

Tim Iacono discusses strategic defaults as a source of increased consumer spending as consumers are spending the money they would otherwise be using to pay a mortgage. He estimates that $1 billion per month could be freed up by individuals choosing not to pay their mortgage. See the following post from The Mess That Greenspan Made.

Zachary Scheidt filed this report at Seeking Alpha in which he wondered how much the wave of mortgage defaults has benefited consumer spending. That is, for those individuals who decide to stop paying their mortgage but stay in their house until someone comes and kicks them out, how big a boost is all that extra mortgage money giving personal consumption, the group that accounts for two-thirds of the U.S. economy.

But with all the headwinds, and with all the negative publicity… the consumer, it appears, is beginning to step up to the plate and once again spend us into recovery.
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It’s been quite a mystery to me for some time now. Exactly where is all this pocket change coming from – especially considering the difficulties we are seeing in other areas (savings rates are once again headed lower, consumer credit hasn’t expanded by any material amount, and despite positive payroll headlines, the underlying report is full of holes).

It wasn’t until this past week when a colleague mentioned the term strategic default did I realize what was likely occurring. Many consumers are spending their mortgage payments! It’s beginning to make sense in the most disturbing way. As homeowners face staggering payments on houses that have negative equity, a large number are simply deciding not to pay their mortgage bill, resigned to the fact that eventually they will lose their house.

And what happens with the money that would have been sent to the lenders? Well, an increasing mentality of “eat drink and be merry – for tomorrow we’re evicted” has set in.

Yes, one of the many oddities about our current economic situation in the wake of the burst housing and credit market bubbles is that many people are making more and more decisions that, ten years ago, would have sounded ridiculous.

This subject was discussed here in The New Foreclosure Trend – Non-Foreclosures not long ago. A back-of-the-envelope calculation revealed the amount of mortgage money freed up to spend on other things is in the billions of dollars per quarter.

This article has been republished from Tim Iacono's blog, The Mess That Greenspan Made.