Incomes Rise, Spending Does Not
Americans earn more yet spend less according to the US Commerce Department:
Instead, they put aside more of their income — or at least, borrowed less and drew down assets less. As a result, the personal savings rate in September, though still negative, was less so than it has been in a year and a half.
The Commerce Department reported today that personal income in September rose at an annual rate of 0.5 percent, seasonally adjusted; the figure for August was 0.4 percent. Personal consumption spending, on the other hand, was essentially flat, rising at an annual rate of only 0.1 percent in September after 0.2 percent in August.
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“Rapid acceleration in spending is extremely unlikely, given the expected drag from the ongoing correction in the housing market,� said Brian Bethune, an economist with Global Insight. “The upshot is an economy that is expected to grow at moderate rates, with less pressure on core inflation. That should keep the Federal Reserve’s finger off the interest-rate trigger for the next two quarters at a minimum.�
As Brian Bethune points out (as quoted in the article), it does not seem to be per definition negative, this development.
Any thought on this from our local economic experts?
P.S. I apologize for the short posts today, I simply do not have a lot of time.
10 Responses to “Incomes Rise, Spending Does Not”
Savings rate is still negative and the brilliant economists running our government into debt hell are complaining that we aren’t spending enough of our increased income? Perahps we have the wrong people doing our government’s financial projections. We are still spending more than we make even with the higher wages. How can anyone look at this as being anything but unsustainable.
Whatever would I spend my 0.5 percent increase on? Would that even fill up your tank with gas? Are they really expecting anyone to get excited by 0.5 percent?
Did the report say which economic brackets got the most increase?
I just hope manufacturers do not lower the supply of goods based on this report. I mean personally i think teh US commerce department is horrible at running numbers (i happen to agree with my political economy teacher). I feel reports like this might scare corporations into lowering supply thus raising prices thus negating the little increase we got.
And rambie i dont know for a fact but im willing to guess 90% of the increase went to the top 10% bracket.
always a student,
randal
I think the fed sees negative savings rates as a bad thing. I think the article got it right when the characterized these numbers as “less unhealthy”.
Rambie, 0.5% = $53 billion. That could fill up a few tanks. Or hopefully pay off a few credit cards.
Looking at the report they don’t break it down by income quintile (which I agree would be interesting), but they do break it down by sector. Pretty much all of the gain was in “Services-Producing industries”. Although that doesn’t really tell us much because that covers everything from stock brokers to wal-mart checkers.
The only thing about this report that really counts is that when consumer spending cools down, inflation does too and as such there is little reason to increase interest rates.
Higher interest rates are hurting the US economy badly.
First of all, it means the price of money goes up for companies. More expensive foreign capital means higher costs equals lower profits.
Secondly, the American population with – as I pointed out some time ago – its substantial debts cannot pay the bill anymore if interest keeps rising.
At a certain point the combination of higher interest and high debts has to take its toll and possibly the slowdown in consumer spending is a first sign of this. Then again, the Fed will be happy as stagflation (stagnating economy combined with high inflation) seems to be a bit further away than it was.
The “less unhealthy” quote pretty much sums this up. It’s true that personal wealth has been growing more than personal income largely due to value gained in homes but personal spending being higher than personal income is a dangerous and unsustainable thing.
Sure, the economy will take a hit if personal spending doesn’t keep growing. However, if personal spending and, as a result, personal debt keeps growing, we’re setting ourselves up for a much more serious economic catastrophe. Regardless of what it does to the economy in the short term, we have to get our spending under control. If we don’t, the long term repercussions will be very serious.
Mr Mod.
Economists from Alan Greenspan to Ben Bernanke have been voicing their concern over America’s low saving rate and high National Debt for some time. It is not the Economists controlling government and personal spending; it is ill-advised politicians and consumers.
Randal.
In the short term, a reduction in consumer demand will actually cause a movement down the supply curve thus creating a lower equilibrium price. In the long term, a commensurate reduction in supply will arrive back at the initial equilibrium price. To put it another way, suppliers can not increase prices while facing falling consumer demand. A supplier selling fewer products can expect to sell even fewer products if they raise prices.
Joey.
First off, from a historical perspective the Fed Funds rate of 5.25% is low.
Secondly, a rise in the cost of capital would coincide with a spike in the yield curve. However, the yield curve is basically flat for the past five years and the yield on U.S. treasuries and corporate paper is also historically low. Rates may be higher than two years ago, but such low rates are unsustainable from an inflationary standpoint.
As far as stagflation is concerned, a country with theses Economic figures from 2001 – 2005 might be experiencing stagflation.
Real GDP growth 1.4% : 0.1% : 0.3% : 2.0% : 1.5%
Consumer Price 4.1% : 3.3% : 2.1% : 1.2% : 1.7%
Inflation
That country would be the Netherlands.
Thx. But besides prices wouldnt a report like this one scare companies into cost cutting payroll and projects and what not because they can expect less demand?
randal
A report that spending does not increase isn’t likely to send any companies but those already on the verge of disaster into rounds of layoffs. If it were a significant drop in spending, or any drop in spending for that matter, it may be a different story but this would seem to be a non-issue for most companies that are not already in a precarious situation.
Cfpete, true. Consumer price inflation went up the first years after the Euro replaced the Dutch Guilder. But stagflation in the Netherlands won’t bother anyone in the US, whereas stagflation in the US will scare many in Holland and elsewhere around the world.
Everyone in Europe and even in Asia is eyeing the US economic situation since its effect on the rest of the world is enormous, as you will know.