Consumer Spending is Slowing

U.S. Department of Commerce figures for the month of April show that consumer spending is slowing.  Specifically, consumer spending rose 0.4% relative to March.  Consensus expectations from economists were for a rise of 0.5%.  If you adjust the data by inflation then spending only rose 0.1%.  Meanwhile, consumer incomes rose 0.4% – exactly matching the expectations.

Analysis: The above data are being explained by commentators as the result of rising commodity prices (like food and gasoline) putting a damper on spending.  Whatever the reason, in a consumer driven economy (70% of GDP) you must have consumer buying in order for the economy to grow.  That spending only expanded 0.1% once adjusted for inflation indicates that the second quarter economic growth is not off to a good start.

All of that said, the good news is that consumer incomes expanded at the same pace as spending.  That means that the budgetary impact of higher commodity prices is met by increases in income.  Yet, economic growth requires consumers having unspent economic ammunition in their budgetary arsenal.  By definition, growth means that more money is spent than before.  Unless of course consumers begin spending more than they earn using debt.  Frankly, long-term, that is a disaster scenario.  The country has to live within its means at the consumer, business and federal levels.  Duh!

Importance grade: 6; we have had two consecutive months of slowing consumer spending.  In March I felt that the slowdown was due to all of the bad news taking place globally: Middle Eastern revolutions and Japanese tsunami overwhelm.  In April the attribution is more difficult.  I don’t consider two months of slowing, yet still positive, consumer spending numbers to be a cause for alarm; but a cause for taking notice.  If May’s consumer spending numbers prove to be a continuance then it will be worth more of our attention.

Jason