Will Consumer Spending Drag Down Economic Growth?

Money

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Personal income increased at a seasonally adjusted annual rate of 0.1 percent in August, according to the U.S. Bureau of Economic Analysis. Real disposable income increased at a SAAR of 0.2 percent, and personal consumption expenditures — a measure of consumer spending — increased at a SAAR of 0.1 percent.

The data came in slightly below expectations. On average, economists were expecting personal income to increase 0.2 percent on the month, spending to increase 0.3 percent, and the PCE index to increase 0.2 percent. The soft data suggest that consumer spending — which accounts for as much as 70 percent of total gross domestic product in the United States — could drag on current-quarter economic growth.

Relatively slow growth in consumer spending, at +2.3 percent, was cited as one reason why real GDP grew at a SAAR of just 1.1 percent in the first quarter. In the second-quarter report, the BEA reported that consumer spending growth slowed to 1.8 percent, agitating concerns of a slowdown.

With both government spending and exports weak in recent months, the economy has relied even more heavily on consumer spending to drive growth. The problem is that persistently high unemployment and anemic wage growth has undermined consumer spending and confidence.

The spending metric, along with its complementary savings measurement, are indicative of the health of the economy. The saying goes that it is not what you make, but what you keep. However, while that may be sound advice, often what is good for the individual — meaning saving money — may not be so good for society and the economy. That phenomenon is known as the “paradox of thrift.”

The personal savings rate, calculated as a percent of disposable personal income, was 4.4 percent in July, flat with June. The savings rate has come up over the past few years but still remains below the level that is recommended by many economists to satisfy retirement account funding needs, which is approximately 10 percent.

Savings

Source: U.S. Bureau of Economic Analysis

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