Consumer Spending Breakdown: The Good, the Bad, and the Ugly
Last Friday, the Department of Commerce’s Bureau of Economic Analysis slashed its advanced estimate for fourth-quarter gross domestic product growth from the 3.2 percent pace it reported last month to a 2.4 percent annual rate, and that 0.8 percentage point drop is equivalent to $32.7 billion. The downward revision was a sign that the economy had indeed lost momentum in the final three months of 2013 as feared. Both the 16-day shutdown of the federal government in October and the unusually cold weather that hit much of the United States in late December weighed heavily on economic activity, while the expiration of long-term unemployment benefits, cuts to food stamps, and the fact that a back stock of unsold goods forced businesses to place fewer orders with manufacturers also weakened growth.
Frigid temperatures have hurt retail sales, residential construction and home sales, industrial production, and kept companiess in the retail, construction, and industrial industries from hiring more employees. Further, poor employment gains directly impact consumer spending — a measure that accounts or approximately 70 percent of the country’s gross domestic product. As Société Générale economist Brian Jones told Bloomberg, “more people with jobs means more money to spend.” Plus, the expiration of long-term unemployment benefits and cuts to food stamps also mean that in the past few months, many Americans were put in a far worse position to increase their outlays.
Yet, despite the tough economic headwinds of fourth-quarter, everyday private-sector activity drove the U.S. economy forward in the fourth-quarter. While real personal consumption expenditures were lowered from a 3.3 percent increase to a 2.6 percent gain, the measure contributed 1.73 percentage points to GDP growth. That pace represented the strongest pace recorded since the first-quarter of 2012 — an encouraging sign after retail sales recorded negative growth for the second consecutive month in January. There is also increasing evidence that consumer spending will stabilize in the new year.
Gallup’s daily self-reported spending data is a piece of that evidence. It is true that in both December and January, the Commerce Department’s retail sales report showed depressed consumer spending. It was postulated that underlying economic problems — and not merely harsh winter temperatures — were the source of retail troubles. Early last year, it became clear that American consumers were keeping their purchases limited to immediate necessities as confidence in the economy, and the economy’s ability to created enough jobs to fill the gap left by the recession remained weak. While the overall picture of consumer spending has been one of improvement, a closer view reveals more conflicting indicators about the health of the average American consumer, especially as stagnant wages continue to impact the spending power of lower-wage earners.
According to a reported released Monday by the research firm Gallup, February spending numbers showed a recovery from January, when consumers reported they spent an average of $78 per day, not including normal household bills and major purchases such as homes and cars. That figure was a 14-month low. However, last month, consumer spending ticked up to an average of $87 per day — an increase from the $83 reported in February 2013 and the strongest February result since 2008. It is by no means unusual for February spending to be higher than January’s level; typically, consumers spend less in the first month of the year after spending relatively more during the holiday season. “The $9 increase between January and February this year ties 2008 as the highest January-to-February increase in the seven years Gallup has tracked daily spending,” noted Gallup’s Jeffrey M. Jones. “To some degree, this increase could be attributed to harsh winter weather holding back January spending, with consumers making up for it in February.”
In particular, higher-than-average spending of $100 per day around Valentine’s day propelled the month’s total higher. A further peculiarity of February’s consumer spending patterns was that lower- and middle-income consumers, who make up a much larger share of the United States population, fueled the increase in last month’s spending. In general, changes in the spending patterns of upper-income Americans — who have more discretionary income than Americans with lower incomes — drive changes in overall consumer spending.
Since spending typically picks up over the course of the year, Jones noted that, “This year’s strong February spending could be a positive sign of things to come.” However, when the Commerce Department’s February retail sales report is released on March 13, economists will have a clearer picture of consumer spending.
The other piece of evidence of strong consumer handed economists Monday was the Commerce Department’s Personal Income and Outlays report. Retail sales shine a light on consumer spending, but personal income and outlays numbers provide a more direct look about the financial state of the American consumer. In terms of income growth, the health of the consumer sector appeared positive in January, but spending was questionable, confirming the dismal outlook expressed in the department’s retail sales report. Household purchases did increase $48.1 billion, or 0.4 percent, following December’s smaller-than-expected 0.1 percent gain. Yet, consumer spending rose as outlays on services recorded their largest increase since late 2001. Likely, it was demand for heat that fueled that jump. Plus, the Commerce Department noted that outlays on services were boosted by increased spending on health care as Americans began to enroll and pay for the Affordable Care Act mandated insurance coverage.
The fact that the Commerce Department reported that outlays were primarily driven by the need for services like heating and healthcare does not discount Gallup’s data, which excludes spending on household bills.
Economists estimate that first quarter GDP growth will remain below 2 percent in the first quarter, but St. Louis Federal Reserve Bank President James Bullard told CNBC television after the revised GDP number was released that he would “still project that 2014 would have stronger GDP growth than 2013 did.” Comparatively, GDP grew at just an average 1.9 percent pace last year. Similarly, TD Securities deputy chief economist Millan Mulraine told Reuters that February’s increase in consumer sentiment, a recent jump in Midwestern factory activity after three months of drops, and a jump in contracts to purchase previously owned homes, which have been falling since July, suggests some stabilization in economic activity. “It bolsters the current narrative that the slowing in activity has been the result of the unseasonably cold winter conditions, which we expect to reverse in coming weeks,” he added.
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