February 27, 2023
Cash on Hand - Flexport Weekly Economic Report
The latest consumption numbers show that personal consumption expenditures have remained steady and that goods consumption is keeping pace with services. Perhaps more striking is the extent to which real disposable personal income and personal savings have turned up again. We look at why.
In Focus - Spending Money
Consumers are still spending and still spending on goods.
According to the Bureau of Economic Analysis’ Personal Income and Outlays report for January, real personal consumption expenditures (PCE) rose by 1.1% in the month. That followed two straight months of declines. The rebound in January put real PCE back above where it was in October. It also served as a useful reminder to be wary of reading too much into any given monthly movement.
Whereas services consumption had risen or been flat in recent months, goods consumption was responsible for the drops of November and December. In January, goods consumption grew by 2.2%, outpacing the 0.6% for services and almost entirely offsetting the drops in the Fall months.
If we zoom out from the shorter-term movements and look over the last six months, taking annualized growth rates, real PCE grew at a 3.1% pace, services at a 3.9% pace, and goods at a 1.6% pace. Distinguishing between durable goods (those meant to last three years or more) and nondurables, the perplexingly-strong growth in durables continued, with a 5.3% annualized increase; for goods that are to last a long time, one might have thought that a surge of the sort we’ve seen would be followed by a dip. Nondurables declined at a 0.5% pace.
And now we get to the subject of this week’s chart: how are consumers financing all this consumption? The chart goes back to a bit before the pandemic’s onset and the top, dark line shows real disposable personal income. We see a key reason why we had a goods consumption boom lifting the US out of the pandemic-induced recession-income grew in the midst of a recession and beyond, driven heavily by government transfers (the lighter blue line, deflated by the PCE deflator).
That’s old news. After the government infusion of spring 2021, transfers abated and so did personal income and goods consumption (not shown in graph). Some of those government transfers had been saved, but real personal savings started receding as well.
All the while, real compensation-the money and benefits people earned from jobs-had been growing at a fairly steady pace, a 3.5% rate from July 2020 to January 2023. That steady gain, however, was overwhelmed by the dropoff in government transfers, which fell by 7.4% from September 2021 to September 2022, when they bottomed out.
Since that low point, transfers grew by 1.4% to January. Combined with the increase in compensation, this helped disposable personal income turn around. From its peak in March 2021, real disposable personal income fell 22.1% to a trough in June of 2022. Since then, though, it has grown by 4.0%, or at a 6.9% annualized rate. Real personal savings also bottomed out in June, but grew by 78.0% to January, from its low base.
Coming out of the pandemic recession and the strong fiscal policy response, there was concern that consumption would decline as the money ran out, potentially paving the way to a recession. The most recent numbers show real disposable income and savings growing at a healthy clip. Maybe consumers can afford to keep shopping a little longer.
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