That was a pretty nifty trick, if you can do it.
We are referring to the fact that households spent-up a storm in January, with PCE (personal consumption expenditures) rising by a whopping $337 billion versus prior month. Alas, disposable personal income, by contrast, increased by a mere $20 billion over the December level, meaning that household outgo was about 17X more than income.
That’s some kind of overdraft!
Admittedly, monthly numbers jump around a lot, and the seasonal adjustment factors are a pure product of the Washington puzzle palace. We are not trying to deliver a “gotcha” point, however, just a remind that neither the Fed nor Wall Street economists have the slightest idea at the moment whether then US economy is “strong” per the consensus or fixing to rollover into recession per the skeptics.
That’s because between the Virus Patrol regulators and the Everything Bailout spenders during the last two years the basic aggregate numbers for the US economy have been knocked into a cocked-hat, and have gyrated wildly from month-to-month in magnitudes which have never before been even remotely experienced.
For instance, here is the month-over-month change in PCE for the last decade. You don’t have to squint too hard to notice that we have been in totally uncharted waters since February 2020.
Whereas normal monthly gains oscillated between $20 billion and $80 billion at annualized rates during the eight years prior to the pandemic, the range then exploded to -$1.74 trillion in April 2020 to +$759 billion in March 2021 and the aforementioned +$337 billion in January 2022
Month-Over-Month Change In PCE, 2012-2022
Needless to say, the usual Keynesians are braying that the January 2022 number is just great because it indicates that the alleged driver of the US economy—the 70% of GDP statistically attributable to consumer spending (PCE)—is hitting on all cylinders.
We’d say, not so fast, however. It seems that US households have been living on giant overdrafts for the past nine months.
As shown in the chart below, disposable personal income (purple bars) has actually declined by -$154 billion at annualized rates since April 2021, while spending (black bars) has soared by just shy of +$1.0 trillion at annualized rates.
So the question recurs. When does the overdraft line get called? When do they figure out that the consumer is not drowning in a sea of cash savings that miraculously swelled up during the pandemic, but is actually living high on the hog as a second derivative beneficiary of Uncle Sam’s bacchanalia of free stuff?
Disposable Personal Income Versus PCE, April 2021 To January 2022
A hint at the answer to that question is evident in the chart below. Since August 2021, the year-over-year gains in aggregate wage and salary incomes (yellow line) have slowed from a $1.051 trillion rate to $1.008 trillion.
At the same time, the rate of incoming free stuff is now crashing. Social benefit transfers to households (purple line) were still +$120 billion in August 2021, but now stand at -$1.82 trillion. In short, the two principal sources of household income are getting hit with a downdraft even as the spending overdraft is being pushed to record levels.
Year-Over-Year Change In Transfer Payments Vs. Wage And Salary Income
Moreover, today’s January income and spending report also highlighted that plunging rates of free stuff (transfer payments) are not the only downdraft hitting incomes: We also had a 40 year high in the PCE deflator, which was up by 6.1% versus prior year.
With transfer payments falling, wage and salary gains leveling out and household purchasing power crashing, therefore, the allegedly flush consumer may not be all that, after all.
Y/Y Change In PCE Deflator, 1982-2022
In fact, the plunge of real disposable income is already happening. After the free stuff palooza in March 2021, its been all downhill. Accordingly, real disposable income in January stood 9.9% below its year ago level!
If that’s evidence of a healthy consumer—the return of the EverReady spending bunny—it is time for some new definitions.
In truth, three things are happening to the consumer, and none of them bode well for a “strong” economy:
- 40-year high inflation is materially eroding purchasing power;
- The Fed is drastically behind the curve and will be raising interest rates for months to come, causing increased carry cost to spill over on the $17.5 trillion of household debt;
- Transfer payments are still running $500 billion (annualized) above normal levels and will continued to come down.
In short, there is no secret stash of household cash that will keep the American spending Ponzi going for years to come. In fact, $30 trillion of public debt and $86 trillion of total debt tell you all you need to know: What lies around the bend is payback time, not Keynesian prosperity.
Y/Y % Change In Real Disposable Income, July 2019-January 2022
