Income and Spending Up Strongly in December

It definitely looks like American consumers have gotten past the worries that slowed their spending growth during the summer. For six straight months, spending has increased, according to the Bureau of Economic Analysis. It rose quite robustly in December, up 0.7%. Meanwhile, personal incomes have also been rising at a moderate pace. They were up 0.4% last month. Yet saving declined, since spending growth outpaced income growth. Enough time has elapsed that we can now make some firm statements about the trends we have been seeing for the past couple of months.

Let's start with the chart for income and spending:

Disposable income growth has tracked personal income growth fairly closely over this period. You can see that, after rising strongly through April, personal income growth (green line) dipped during the early summer months. Since then it has mostly rebounded. For the last three months shown it was up quite strongly.

But spending growth (red line) has been even more aggressive since June. Americans haven't been shy about opening back up their wallets during this period. Since June, annualized personal consumption increased by $295 billion, or 2.9%.

Whenever spending growth outpaces income growth, however, saving suffers. That's pretty clear from its chart:

It hasn't managed to squeak past 1% during any month since June. It was down 3.2% in December. Since June, annualized saving is down 14.7%.

Looking at the past six months of data for the second half of 2010, we have a pretty clear trend. Incomes are increasing at a modest, but fairly steady, pace. Spending is rising a little more aggressively. Saving, however, has taken a hit.

These trends provide some good news and some bad news. First, it's quite clear that Americans must be broadly more comfortable with their economic situation than they were in the middle part of 2010. Although underemployment is still hovering around a staggering 17%, the other 83% of Americans must be picking up the slack to keep spending rising. This consumer demand is important for firms to sense so that they will begin to hire at a brisker pace.

But the other part of the narrative isn't so good. Some of the spending is coming at the cost of saving. While net saving is still 5.3% of disposable income, that's down from 6.3% in June. That's a pretty big drop in just six months. This likely means one of two things. It could imply that Americans feel comfortable that they have got their fiscal houses back in order, so they don't need to continue to save so much. Alternatively, it could mean that consumers are back to their old spend, spend, spend and save very little frame of mind, now that the economy's worst problems appear behind us.

So today's report doesn't provide the ideal sort of news where incomes and spending are rising, but not as much as saving. Still, at this time, spending is an important component of the recovery to get firms hiring. We just have to hope that saving doesn't continue to decline indefinitely.