Consumer Spending Ticks Up

While we hunker down waiting for hurricane Sandy to churn its way inland we can ponder today’s consumer spending report and its attached reading on inflation.

It seems that consumers have settled down over the past few months and been more willing to go to the stores. Spending rose 0.8% in September whereas personal incomes rose only 0.4%. Obviously this implies that the increase in spending came at the cost of a draw down in savings – the savings rate dropped to 3.3% in September, compared with 3.7% in August and 4.0% in July.

This is yet another in a series of reports that suggests consumption, or at least the willingness to spend, has recovered from the doldrums. Since consumer spending accounts for about two thirds of the entire economy, any such improvement can only be a positive sign.

But deeper in the report we find that real disposable incomes, that is income adjusted for inflation and after taxes are deducted, was flat. This remains the economy’s long term achilles heal. As long as the vast majority of people are seeing little or no increase in wages, or at least sufficient increase to offset inflation, then there is little hope of a strong and sustained recovery in consumption. The most likely pattern we can hope for is a series of fits and starts with some months being better than others and with no discernible surge.

Also buried in the latter parts of the report is the news that the measure of inflation used to adjust incomes rose 0.4% including the volatile items like gasoline and food, or 0.1% if we exclude those items. Both the total inflation index and the core index have risen 1.7% over the last twelve months. So inflation is not an issue for policy makers to concern themselves with.

There is not much new to conclude form all this.

It simply confirms what we already know both about the current state of the economy and about our long term constraints. It is good to see that a modicum of lost private sector demand is returning. But it is disturbing to read those wage reports and to understand their implications.

The best we can say is the recovery is on solid ground for now. That it will plod along at or near to its current pace. And that we still need a substantial policy effort to get us into a higher gear.

Oh. And that austerity next year would be a terrible idea.

Unfortunately when we see what policy makers are concerning themselves with: inflation and an austerity program, we get the bizarre sight of our leaders getting ready to deal with non-existent problems whilst doing their best to ignore the very real and urgent problems regular people have to face.

This is a dereliction of duty, but there seems to be no way of punishing them. There are beholden to the plutocrats. The rest of us no longer matter.