Incomes Rise Slightly as Real Spending Falls in May

Consumers appear skeptical that the recovery is moving forward

590 shoppers REUTERS Kevin Lamarque.jpg

Americans may be back in a recession state-of-mind. Although incomes rose in May, inflation-adjusted spending fell. Meanwhile, saving rose. This consumer behavior, reported by the Bureau of Economic Analysis, is what we would expect to see when an economy is in decline -- not in recovery. The month's results aren't particularly comforting, as it's clear Americans had little confidence about the path of the U.S. economy headed into the summer.

Let's start with the chart for income and spending, not adjusted for inflation:

income spending 2011-05.png

From the chart, you can see that incomes still grew modestly in May. Personal income rose  at the rate of 0.3%, while disposable income increased at the rate of 0.2%. Meanwhile, however, spending was virtually flat.

But when you take inflation into account, the picture worsens:

real income spending 2011-05.png

Suddenly, both income and disposable income barely grew, both increasing by just 0.1%. And spending declined for the second month straight -- by 0.1%. That's not a big decline, but it's an ugly trend. Prior to April, real spending hadn't fallen since January 2010. And real spending hasn't declined for two months straight since March and April 2009.

Since spending fell while incomes increased, saving must also be rising. Here's its chart:

saving 2011-05.png

Indeed, in May saving was the highest it's been since April 2010. If there's any silver lining in today's report, this is it. As Americans save more, they'll feel more confident about being able to spend more of their income in future months. Yet for a recovery to strengthen, that spending needs to happen sooner rather than later. In this context, more aggressive saving isn't wonderful news.

So in May, we saw Americans spend slightly more than they did in April in nominal dollars. But since inflation has been rising, they got less for their money. That caused a decline in real spending. Meanwhile, incomes rose by a greater margin than spending, which drove up saving.

As mentioned at the start, this isn't the sort of consumer psychology you would expect to see during a recovery. It indicates that Americans believe that the economy isn't moving in a direction they like. As spending shrinks, the recovery will only get slower. Without sensing rising demand on the part of Americans, firms won't ramp up hiring. And without more hiring, Americans will continue to fear the worst: the recovery has hit a bump.

The good news is that gasoline prices have begun to decline a bit. They're largely blamed for causing the recent slowdown. We'll have to wait until later this week, once June's data starts pouring in, to see if summer has begun to heat up Americans' desire to shop or if spending has fallen even further.

Image Credit: REUTERS/Kevin Lamarque

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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