Consumer Spending and Incomes Rise

This morning the U.S. Department of Commerce announced February’s consumer spending and income numbers.  Spending was up 0.7% versus an expectation by economists of up by 0.6%.  Similarly, income was up 0.3% compared to the 0.4% up that economists had predicted.  Lastly, the savings rate declined slightly to 5.8%.

Analysis: The consumer spending number is powerful evidence of growing consumer confidence.  Even though a quick survey of U.S. consumers showed a decline in confidence in February, consumers continued to spend despite two massive crises.  The first are the rolling revolutionary spirit circulating through the Middle East that caused oil prices to rise – something consumers felt in their wallets immediately.  Second, was the devastating earthquake, resultant tsunami and resultant nuclear meltdown in Japan.

I can guarantee you that if these crises had happened last year at this time that consumer spending would have tanked and the economy might have fallen back into recession.  That a debt crisis in Greece almost unseated the U.S. consumer’s confidence last year was evidence of weakness.  Instead, now amid two of the most intense crises in my investment career, happening simultaneously, consumers continued to spend.

I also want to highlight, as I have before, that economists were very accurate in their predictions of each of the above statistics.  I have related before on the blog that this is also a sign of growing stability.  When data become predictable it effectively means that “things are working as they should.”

That consumer spending outstripped income growth means that savings had to decline.  This is exactly what happened.  Excess consumer spending is something that I have decried from the beginnings of the blog.  Each major entity in the U.S. economy spends beyond its means: consumers, the U.S. government, and many businesses.  The gap is made up by taking on debt; debt financed by private individuals or foreign countries.  Ultimately, that is a prescription for mass economic instability.

However, because of the timing of the spending uplift by consumers amid big simultaneous crises, I am pleased just this once.

Lastly, consumer spending makes up 70% of gross domestic product (GDP), so an increase here is a positive sign for an increase in GDP, even if its not an increase of real economic growth.

Importance grade: 9; enough said.

Jason