It’s only Tuesday, but we’ve already had a number of important developments on the U.S. economy this week, specifically, on the state of the American consumer. And these days, the consumer is more important than ever; economists estimate that over two-thirds of the country’s economy stems from consumption! So let’s take a look at what these reports had to say about this pocket of the economy.
First up was the Department of Commerce’s update on personal income. Personal income covers income from all sources and is a way to gauge the spending power of the average American consumer. In December, personal income climbed 0.5% to $61.3 billion, above the consensus estimate of a 0.4% gain. The primary driver was a $29.1 billion jump in private wage and salary disbursements. Government wage and salary disbursements increased just $0.4 billion last month, suggesting that the private sector is bankrolling most of these gains.
The report also covered personal consumption expenditures (PCE), which covers the consumption of durable goods, nondurable goods and services. Unfortunately, personal spending was largely flat in December, following a 0.1% gain in November. It appears that consumer spent less and saved more in December, with the personal savings rate increasing from 3.5% in November to 4.0%.
Moving on, another important report from this week was the Conference Board’s measure of consumer confidence. Each month, the Conference Board surveys 5,000 households to figure out how consumers feel about the current economy as well as their expectations for the future. In this survey, their expectations make up 60% of the index while current conditions account for the rest.
This survey compliments the University of Michigan’s consumer confidence index, but sometimes the two organizations draw remarkably different conclusions. That was the case for December. Today, the Conference Board reported that consumer confidence declined from 64.8 to 61.1. Economists predicted that the measure would rise all the way to 67. However, last week the Michigan Sentiment index rose from 74.0 to 75, beating out the consensus estimate of 74.5. These two indices have moved upwardly in tandem for the past few months, but it looks like consumer confidence is once again becoming harder to nail down. Neither of the reports included drastic changes to the upside or downside, so we’ll need to see some more data before a trend emerges.
So, these reports included a mixed bag of news: On the one hand, personal income made gains in December, increasing consumers’ spending power. On the other hand, consumers are putting this extra money away rather than spending it. Finally, the reports are mixed about consumer confidence, so it’s too soon to tell whether it’s gaining or losing ground. Fiscal discipline is a smart move for many households, but an increase in consumer spending is needed to fuel the economy.
All-in-all, I’m optimistic about the data for January because already we’re seeing improvement on some critical fronts. Jobless claims continue to drop, suggesting an uptick in hiring, and the stock market has had its best January since 1997! Some of the best performing large-cap blue chips are in retail, so, I think that consumers are starting to pull their weight.
Looking ahead for the rest of the week, we have plenty more economic reports to cover. Most notably, we have a huge report on the unemployment rate at Friday’s open, and you can bet that I’ll be watching for this like a hawk. So, be sure to stay tuned to this blog for more details.