Hiccup or Real Concern -- April's Drop in Real Consumer Spending

The BEA (www.bea.gov ) published April’s Real Consumer Expenditure (RPCE) with a press release heading that read “Real Consumer Spending Falls in April.” Following this announcement I saw quite a few reactions. Most of them lamented the 0.3% April decrease and worried loudly that the general slowdown experienced in the first quarter might continue into 2014. The Wall Street Journal on May 31 wondered if economists’ projections might be too rosy for the coming year.

Note: This paragraph has changed thanks to an alert reader Danny finding an error in a calculation. See my comment below for more information. The newest data releases contain valuable information. They always do. They are news. But it is safe to say that one month’s spending data can also be highly misleading. For example, while April’s RPCE did fall by .3% it is also true that RPCE rose by .5% in February and .8% in March. If you average over these three months you get an average monthly gain of approximately 0.33%. Dig a little farther. These data are presented in real terms and are one-month growth rates. They have not been annualized. A 0.33% average annual compounded real spending gain amounts to almost 5% per year. If the three month Feb to April annual average gain were to keep up for the rest of the year – RPCE would increase by about 5% more than the inflation rate. That would be a pretty good year. I am not saying that growth rate will keep up. But if you get away from one month and take a longer look at what happened in the last three months – you get torrid growth in consumer spending.

While pessimists have focused on various disappointments in wages, this BEA report for April contained more hopeful information about personal income (PI) change. During the three months from Feb to April, PI rose an average of .4% per month. Removing consumer inflation and taxes you get real Disposable PI rising just shy of 0.3% per month. If you annualize that you get about 4% per year. While not spectacular, a 4% growth in real DPI means households were earning a lot more than inflation and taxes – with room left to spend and save to the tune of 4% more per year. I should also note that the personal saving rate averaged about 4% during those three months.

Monthly data is crazy. Suppose…

·        After a successful 10 month diet where you lost 40 pounds, you gained a pound yesterday.

·        After 22 miles into a marathon run, you averaged a slower pace over the last half mile.

·        After 45 years of marriage your faithful spouse was late for dinner last night

·        After winning 90 percent of their games your favorite sports team is behind its opponent at halftime.

·        After eating seven chili dogs your burp.

Okay, so I had a few JDs. But you get the point. The last observation is only the latest one. It might be a wonderful indicator of what is to come next. Maybe you will gain another 39 pounds. Maybe you will not go on to eat 12 chili dogs and not get your name on a plaque at the Corner Bar in Rockford Michigan. But then again, maybe the last observation is an aberration.

Monthly data bounces around. Stuff that usually happens in April this year might have been done late in May because of holidays, or weather, or because someone forgot! This is why we usually do not make too much out of last month and often either wait and see – or we combine last month with a longer stream of information to get a broader picture. When we do this with BEA’s spending, income, and saving data we get a pretty positive picture.

I am betting on momentum. Look at all the housing and stock market wealth that has been created in the last year. And while much of it went to high income people, a lot of it went to elderly and other people whose income depends on housing and stock prices. Employment gains have been slow but cumulative with a 2.3 million increase in workers on nonfarm payrolls in the past year. Note that while real GDP did contract in 2014 Q1, real consumer spending was up by 3.1% at an annual rate in that otherwise dubious quarter. The down quarter in real GDP came after four quarters with rates of 1.1%, 2.5%, 4.1% and 2.6%.

Betting on momentum and inertia does not translate into a record growth rate for 2014. But it does suggest a year in which overall real GDP and consumer spending will continue to gather steam and grow.  Analysts had fun getting all pessimistic about April’s consumer spending decline. But I doubt it is anything more than a little hiccup in an ongoing and fretful economic expansion.