Looking at the spending component of this morning's Personal Income and Outlays report for February, it still pays to focus on the path of spending rather than to become terribly hopeful or despondent about the twists and turns along that path:
The 0.5% gain in February compensated for some earlier weakness in the numbers, while the overall trend holds - spending is rising about 0.18 percent per month compared to 0.24 percent prior to the recession. Spending was supported by a drop in the saving rate, down to 3.7% from 4.3% the previous month. This likely reflects borrowing for new auto purchases - note the stronger trend in durable goods spending:
The acceleration in auto sales is clearly supporting this trend since the middle of last year. Apparently, what's good for Detroit is still good for America. The importance of autos in sustaining spending begs the question of what will occur when pent up demand is satisfied? Obviously, auto sales will stop contributing positively to growth as sales level off at some point in what I would expect to be the not to distant future. This is especially the case considering the anemic pace of personal income growth:
Hopefully, income growth will accelerate as the labor market improves. Otherwise, households will need to take on additional debt or running down saving rates to hold the current trend in place.
Bottom Line: Consumer spending continues to rise, although the sustainability is still called into question because of the reliance of pent-up demand and falling saving rates to support underlying trends. That said, for all the ups and downs in the monthly data, the trend has generally been upward at a pace that is disappointing compared to pre-recession trends. Slow and steady has been the best bet.
