Fourth-Quarter Economic Growth Was an Ode to the Consumer

Dirty Money


Consumers in the United States pulled off a neat trick in the fourth-quarter: they managed to spend more money without earning more money — or, at least, they spent money faster than they earned it. According to the U.S. Bureau of Economic Analysis, real disposable personal income — what people have left to spend after taxes and inflation (chained 2009 dollars) — declined by 0.2 percent in December, while personal consumption expenditures increased 0.2 percent on the same basis. Using current dollars, real disposable personal income was flat, and personal consumption expenditures increased 0.4 percent.

For the quarter, the BEA reports that real personal disposable income increased 0.8 percent, a dramatic deceleration from a 3 percent increase in the third-quarter. Personal outlays, meanwhile, increased by 4.0 percent for the quarter.

There are both pros and cons to this trick. At the the individual level, the net effect of this is higher debt and slimmer savings accounts — both negatives as far as the individual is concerned. Total personal savings in the U.S. — disposable income minus outlays — fell 11.8 percent to $545.1 billion. The personal savings rate (as a percentage of disposable personal income) fell 0.6 percentage points to 4.3 percent. The Federal Reserve hasn’t published consumer credit data for December yet, but revolving consumer credit outstanding increased at an annual rate of 6.3 percent in September, 7.0 percent in October, and 4.8 percent in November, an average growth rate of about 6 percent.

These burdens, though, have been a boon for overall economic growth. Consumer spending accounts for as much as 70 percent of total expenditures in the U.S., and a 3.3 percent increase in real personal consumption expenditures in the fourth-quarter was the driving force behind overall gross domestic product growth for the period.

To put it another way, at the expense of their personal finances, consumers picked up the U.S. economy on their shoulders and carried it through the new year and in to 2014. Everyday private-sector activity drove the economy forward despite the macro-level snafu the nation has found itself in. Consumer spending — uninspired by any meaningful increase in income — offset a 12.6 percent decrease in government spending in the fourth-quarter to push annual GDP growth to 3.2 percent for the period.

For the record, the consumer didn’t do all of the heavy lifting, just most of it. Real fourth-quarter GDP growth received positive contributions from non-residential fixed investment, increases in private inventory investment, and even a marginal increase in state and local government expenditures (although the rate of spending growth at this level decelerated).

Real disposable personal income increased a whole 0.7 percent in 2013, according to the BEA, while real personal consumption expenditures increased 2.0 percent. The moral of the story — which is pretty familiar by this point in American history — is that consumer spending growth is outstripping income growth, and in order to compensate people are saving less and taking on more debt.

It may be a testament to the familiarity of this unsustainable situation that consumer confidence, as measured by the Conference Board’s Consumer Confidence Index, jumped 3.2 percentage points in January to 80.7. Lynn Franco, director of economic indicators at the Conference Board, commented that, “Consumers’ assessment of the present situation continues to improve, with both business conditions and the job market rated more favorably. Looking ahead six months, consumers expect the economy and their earnings to improve, but were somewhat mixed regarding the outlook for jobs. All in all, confidence appears to be back on track and rising expectations suggest the economy may pick up some momentum in the months ahead.”

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