Slower Consumer Spending: Weakness or Good Judgement?

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On the last day of April, the U.S. Commerce Department released its most recent report on consumer spending. The figures seem to reinforce the impression that the economy began to tail off late in the first quarter of 2012. Further, the details of the report hinted at underlying problems for the economy that won't be solved by more trips to the mall.

In a sense, the March figures on income and outlays suggest that American consumers behaved rationally. That may be good news in the long run, but it is not the type of quick fix that would send stocks and deposit interest rates immediately higher.

Consumer spending slows

In a statement accompanying the March figures on personal income and outlays, Deputy U.S. Commerce Secretary Rebecca Blank pointed out that personal income rose for the 28th consecutive month, and that consumer spending was up 2.9% in the first quarter.

Despite the positive spin, the numbers suggested signs of consumer weakness. For example, though personal income may have risen for 28 consecutive months, some of those increases were purely the effects of inflation. After taxes and inflation, personal income actually declined in January and February.

Also, while consumer spending may have posted a solid gain for the quarter overall, it slowed dramatically in March. After a 0.5% gain in February, real (inflation-adjusted) consumer spending fell back to a 0.1% increase in March. This slowdown in consumer spending fits with the general tone of recent economic data, which suggests that the economy lost momentum as the first quarter progressed.

The underlying problems

The details of the Commerce Department report reveal one of the underlying problems for the economy. Although income growth exceeded consumer spending in March, this was the only time in the first quarter when that was the case. Factor in taxes and inflation, and the comparison between income and spending growth during the first quarter becomes even more unfavorable.

This helps explain March's slowdown in consumer spending. Even though spending had seemed strong in January and February, this was not sustainable when real personal incomes were declining. By pulling spending growth back to within the levels of income growth during March, consumers were simply exhibiting rational behavior.

This rational behavior may have been forced on consumers by one of the other underlying problems in the economy: the fact that debt levels are back near all-time highs. Having consumers boost spending by borrowing is a limited option these days; it will take actual income growth to fuel spending going forward.

Ultimately, this is part of what ails savings account rates. Stronger loan demand could potentially boost those rates, but with consumer credit largely tapped out, that loan demand might not come until much later in the economic recovery -- once income growth has put consumers in a solvent enough position to contemplate taking on debt again.

The original article can be found at consumer spending: Weakness or good judgement?