Come on, consumers! What are you waiting for? Get out there and spend!
That may be a bit over the top, but it seems to fit the message of businesses and economists who are frustrated by the slow pace of economic growth. Consumer spending drives approximately 70% of the economy, and it is difficult for manufacturing to increase and the economy to grow without sufficient consumer demand. Yet consumer spending is staying stubbornly low, defying expectations that windfalls from lower gas prices should translate into increased spending.
The June report from the Bureau of Economic Analysis (BEA) shows that April’s consumer spending was essentially flat. March showed a 0.5% increase, raising expectations that spending was turning around from winter decreases, but the April figures suggest otherwise. Meanwhile, earnings rose by 0.4% over March, suggesting that consumers really do have more disposable income.
Where has the money gone? It appears it is mostly going toward paying down debt or into savings accounts.
Figures from the St. Louis Federal Reserve show that personal savings rates of after-tax incomes increased by 0.4% to 5.6% in April, returning the savings rate to an upward trend that began in December 2014. Meanwhile, other Fed data shows that the financial obligations ratio, a broad measure of all consumer financial obligations compared to disposable income, slowly shrank throughout 2014 (2015 data is not yet available). That change has not made much of a dent in total consumer credit, estimated at $3.34 trillion as of February 2015.
The above combination of economic data suggests that Americans have not fully bought into the overall economic recovery and are being cautious with their money. Paul Ashworth, the chief U.S. economist at Capital Economics, puts it this way: "The April income and spending figures are another reminder that even though their incomes are rising at a healthy pace, households are still reluctant to boost spending more freely."
People appear to be waiting for a more permanent rise in their income to increase their spending levels — and is that not smart fiscal thinking?
Wages may have begun to rise, but there is not enough of a running trend or a broad wage increase across all sectors to give people the confidence to make large purchases. This also seems to imply that people recognize lower gas prices as a short-term transient windfall that is best put into savings or paying debts.
Most economists are sticking to the script that spending will improve throughout the year as the weather warms up and economic confidence increases. That is a reasonable assumption.
Consider that in the April numbers, spending on services actually edged up slightly by 0.2%, but both durable goods (larger ticket items) and non-durable goods like food and clothing showed big declines. Consumers will continue buying staples. Purchases of non-durable goods cannot be put off forever. The just-released retail sales report for May backs up this narrative, showing an increase of 1.2% for May and a revision of March's bad numbers to a 1% increase.
Another possibility is that Americans are taking the advice of financial experts and saving for larger purchases instead of overextending their credit, or saving down payment money or improving their credit situation in order to buy a home. The result would be a slower short-term economic gain for a healthier long-term gain down the road. That is not necessarily a bad thing.
The next few months will be critical to assess whether the economic recovery is set to take off via consumer spending finally, or if we are more likely to spend another year spinning our economic wheels. Let's hope for growth...and, if you can, get out there and spend. Just don't be reckless about it.