Personal Spending Will Pick Up, But Wages Continue to Lag

Thursday’s personal income and outlays report will show strong personal spending that continues to outpace personal income.

Personal income will likely rise by 0.2 percent for this month, down from 0.4 in February, according to a Bloomberg survey of 69 economists. The slowing personal income growth rate suggests that the trend of stagnant wages amid economic growth isn’t going away anytime soon.

“What we’ve seen so far is no, wages have not increased, have not kept up with productivity, have not kept up with economic growth in general in the United States. And that’s a big problem, it’s a crisis really, especially for people in low-wage occupations,” said Irene Tung, senior policy researcher at the National Employment Law Project.

Despite weak personal income growth, spending is going to rise. According to the Bloomberg survey, personal spending will come in at 0.5 percent, up from 0.1 in February.

What explains the discrepancy in higher spending but lower personal income growth?

“Hourly wage rates are rising at a modest pace, but more people are working and working for longer hours. That’s why the total sum of household income is rising,” said Paul Ashworth, chief North American economist at Capital Economics.

The increase in the number of hours Americans are working, along with other factors like warming weather conditions and continued savings at the gas pump, are likely why spending increased.

Featured imageThis uptick in spending comes despite the recent drop in the Consumer Confidence Index to 95.2 in April from 109.5 in March.

The savings rate as a percent of disposable income for March will likely hover around it’s February rate of 5.8 percent, but looking ahead – it is likely to fall.

“We feel that the recent uptick in that is somewhat temporary, we do feel that consumers will spend more in the windfall that they receive from the dropping energy prices,” said Andrew Douglas, senior vice president and chief investment officer at Dubuque Bank & Trust, Asset Management.

In addition to warming weather, which often correlates with higher spending, there is often a three month lag for spending after a major drop in oil prices.

“Historically, there’s always been a lag between drop in energy prices and an increase in spending,” said Douglas.

Looking forward, personal wages and spending numbers will play an important role in trying to figure out if and when the Fed will raise interest rates. So long as wages continuously lag economic growth – despite improved personal spending – a strong labor force remains elusive.

[Photo courtesy of Matthais Ripp]

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