Incomes Up, But Spending Weak

By:
Peter King | June 28, 2010
Personal incomes rose 0.4 percent in May, but consumers held the lid on spending, driving up the savings rate while limiting the increase in personal consumption to 0.2 percent for the month.
 
The increase in incomes was largely in line with what economists had expected, but the boost in savings was not. Economists had expected the spending rate to increase roughly in step with the rise in incomes, but it appears consumers are being somewhat cautious with their additional earnings.
 
Personal savings rose to 4.0 percent of disposable income in May, up from 3.8 percent in April. The figures are from the Commerce Department’s Bureau of Economic Analysis’ monthly report on personal income and disposition, released today.
 

Pent-up demand may be spent

 
Economists had hoped for signs of stronger consumer spending, since it accounts for roughly two-thirds of all economic activity and is a key driver in any economic expansion. Consumer spending has been relatively flat the past two months after growing at a fairly strong rate from October through March, suggesting the “pent-up” demand from the economic downturn may have played itself out.
 
Even so, wages have continued to increase at a steady, though modest, pace during that time, growing an an average annual rate of just over 4 percent since October.
 
The May increase in personal incomes was spurred in part by hiring for the 2010 Census, which accounted for $5.7 billion out of a $6.6 billion increase in government wages and salaries, which were up 0.55 percent for the month.
 
Private wages and salaries kept pace with the overall increase in personal incomes, posting a 0.44 percent increase, an increase of $22.8 billion in May. Business owners’ incomes were roughly comparable, with nonfarm proprietor’s incomes up $4.2 billion for the month, a 0.40 percent increase.
 

Chicago Fed reports "mature" recovery

 
At the same time, the Chicago Federal Reserve reported this morning that economic growth over the past three months has exceeded the historic average and appears to have reached a level associated with a mature recovery following a recession. The three-month moving average on the Chicago Fed’s National Activity Index rose to +0.28 in May, up from +0.05 in April.
 
A rating of zero represents the historic average for economic growth; a three-month average of +0.20 percent typically indicates a mature recovery.
 

Housing still weak

 
The consumption and housing portion of the index remains weak, however, falling to -0.42 in May, down from -0.40 in April, driven in part by declines in housing starts and building permits. At the same time, manufacturing is showing signs of strength, with production-related factors making a +0.51 contribution to the index in May, with industrial production posting a 1.2 percent increase for the month.
 
Combined, those figures suggested a slight softening of economic growth in May, with the overall index declining to +0.21, down from +0.25 in April.
 
The index is based on a compilation of 85 indicators of national economic activity. A three-month average below -0.70 indicates a recession; a figure above that suggests a recovery is underway. A figure of +0.70 after two years of expansion signals a period of sustained inflation has likely begun.

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