The Big Picture–Table 10 is a Hot Spot

Something stood out in the economic data this past week and we're not talking about the standout employment report for July. We'll get to that in a bit.

The thing that stood out to us was found in the Personal Income and Spending Report for June. Actually, it was found deep down in the report -- in Table 10 to be exact -- where few outside observers might dare themselves to go.

Table 10 might be the hot spot at your local restaurant, but in the aforementioned report, it was a hot spot of differentiation in the year-over-year pace of real disposable income growth and real personal consumption expenditures (PCE) growth.

One is growing faster than the other and, by doing so, some big picture questions are being raised about where the U.S. economy may be headed.

Income Is the Driver

There is a close correlation between income growth and spending growth. When income growth accelerates, spending growth typically does, too, and when income growth decelerates, spending growth typically follows.

Rising levels of consumer confidence are always talked about as being a good portent for consumer spending. Let's just say they don't hurt, but when it comes to the outlook for consumer spending, personal income is without question the most important driver of things.

So, the thing that stood out to us in the Personal Income and Spending report for June was that real PCE growth increased at a faster pace than real disposable income growth. In fact, June marked the third straight month that has been the case. But, wait, that's not all!

What also stood out -- in Table 1 to be exact -- was the personal savings rate. It came down for the third month in a row, slipping to 5.3% after hitting 6.2% in March. With spending growth going up at a faster pace than income growth, and that happening at the same time the personal savings rate is falling, it effectively means consumers are spending out of savings.

The key question is: why are they spending out of savings?

Within Reason

By and large, people spend out of savings for one of two reasons: (1) because they have to or (2) because they feel comfortable about their income prospects, which often flows from their comfort level about job security.

The manner in which the prevailing answer tips has big ramifications for the U.S. economic outlook considering real PCE accounts for 69% of real GDP.

If consumers are spending out of savings because they don't have enough income to cover their basic needs, that is a problem that will ultimately resolve itself in weaker economic growth. There is only so much savings to go around.

If consumers are spending out of savings because they are confident about their income growth prospects, then the U.S. economy could be poised for an acceleration in growth considering an increased propensity to save money in recent years has acted as a restraint on an economy that thrives on consumer spending.

If income growth materializes as expected, it will enable consumers to replenish spent savings and most likely foster increased demand for credit.

We all saw what happened to the economy in 2008 and 2009 when the credit spigot got turned off, so it isn't a stretch to recognize that an expansion in credit that is joined with stronger income growth would be a positive developments for U.S. growth prospects.

Better than Average

The upshot of the July Employment Situation Report is that it showed another month of healthy job creation. Importantly, the report also revealed a nice pickup in average hourly earnings, which were up 2.6% year-over-year, tying the highest rate of growth seen since July 2009.

That is good news and it is what one would hope to hear on the heels of the news that GDP growth averaged a measly 1.0% in the first half of the year.

It is a piece of data that would seemingly support the notion that consumers are spending out of savings because they are feeling more confident about their income growth prospects.

What It All Means

What Table 10 in the Personal Income and Spending report means is that a meaningful economic trend is unfolding.

Still, though, it is too soon to tell if this developing trend of consumers spending out of savings is a harbinger of much better economic growth in the U.S. or a foreshadowing of continued lackluster growth.

Not to sound like the Federal Reserve, but more time and data will be needed to get to the answer.

Keep a watchful eye, then, on the Personal Income and Spending Report. In particular, train your eye on Table 10, which is a hot spot for determining where this economy is headed and why.

Patrick J. O’Hare,

S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. Indices are unmanaged and one cannot invest directly in an index.

Data and rates used were indicative of market conditions as of the date shown and compiled by Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results.

Park Avenue Securities LLC (PAS) is an indirect, wholly-owned subsidiary of The Guardian Life Insurance Company of America (Guardian). PAS is a registered broker-dealer offering competitive investment products, as well as a registered investment advisor offering financial planning and investment advisory services. PAS is a member of FINRA and SIPC.

2016-26995 Exp 8/2018

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