Consumer spending data for March were released yesterday, and the 0.6% increase was the highest in five months, with strength in durable goods helping to drive the number. To state the obvious, for a consumption-based economy, this bodes well. Anecdotal evidence is accumulating of rosier cheeks and a jauntier step for segments of the economy, and objective market participants have to consider the possibility that the consumer is finally bellying up to the punchbowl. Nevertheless, we have to ask the following question: Whence came this consumption? Personal income gained in the month, up 0.3% (versus +0.1% in February, +0.4% in January), but it was flat without transfer payments. Currently, consumer debt is not a likely source….it’s been falling since July 2008….nor is home equity withdrawal. (Aaahhh, the good old days.) So this indicates that the source of marginal spending money is likely a combination of government checks, strategic defaults on home mortgages, the acceleration of cashing out of money market and other mutual funds, or something else entirely. What we have is not only a decline in the personal savings rate to 2.7%, the lowest monthly reading since the month of the fall of Lehman, September 2008, but as the graph below illustrates we also are witnessing a growing divergence between real personal income and consumption expenditures.
Americans are a forward-looking lot, so perhaps there is an element of positive thinking at work. The latest consumer confidence readings are mostly, well, confident, and today’s stock market performance notwithstanding the equity markets are discounting better days ahead. Nonetheless, we don’t believe it is time for consumers to start drinking too much of the kool-aid in the punchbowl, as the present still holds reason to pull back. As the graph below demonstrates, the trend in personal bankruptcies would seem to belie the optimism built into these data. (Hat tip to Calculated Risk for the graph idea.) Better make that drink a spritzer.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.