The Tank May Be Half Empty But Gas Was Cheaper

Consumer spending –- known in government parlance as Personal Consumption Expenditures (PCE) -- fell 0.2% in April, which is the weakest performance since May 2012 and, some observers say, a harbinger of a stall in the economic recovery.

"Consumer spending is on a very modest track because income is not growing very much. Wage gain is very low even though job growth has picked up," Kevin Logan, chief U.S. economist at HSBC Securities, tells’s Lucia Mutikani.

Personal income decreased $5.6 billion, or less than 0.1%, and disposable personal income (DPI) decreased $16.1 billion, or 0.1%, according to the Dept. of Commerce’s Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $20.5 billion, In March, personal income increased $36.2 billion, or 0.3%, DPI increased $25.4 billion, or 0.2%, and PCE increased $14.2 billion, or 0.1 percent, based on revised estimates.



Bloomberg’s Shobhana Chandra writes that the results “point to a cooling in growth this quarter as higher U.S. payroll taxes and budget cuts restrain the world’s largest economy, giving Federal Reserve policy makers reason to keep pumping money into financial markets.”

“Spending growth is going to be soft,” PNC Financial Services Group’s senior analyst Gus Faucher, tells Chandra. “Inflation is too low from the Fed’s perspective, so they are going to be cautious about tapering” bond purchases intended to boost the economy. We will see better growth toward the end of the year.”

But there’s a cheerier short-term way to look at the news, too. An AP story posted on the New York Times website attributes the decrease in overall spending to declining gasoline prices and the fact that a mild April allowed consumers to spend less on heating their homes. What’s wrong with that?

And USA Todayreports that, whatever Commerce’s data say, the “Thomson-Reuters/University of Michigan consumer sentiment index reached 84.5, its highest since July 2007. The report, out Friday, exceeded expectations as consumer sentiment was predicted to reach 83.7.”

The report attributes the positive feelings to an increase in hiring, rising home prices (up 11% in the last year) and the bull market on Wall Street. 

“Rising prices tend to make homeowners feel wealthier and more likely to shop,” according to the story. “Some economists estimate that for every dollar increase in home values, consumer spending can rise as much as 10 cents.”

"The data clearly suggest a faster pace of growth in consumer spending during the year ahead than was anticipated even one month ago," survey director Richard Curtin said in a statement cited by Reuters.

Meanwhile, some economists suggest that the consumer economy might not be as bad as it seems in government and academic data simply because so many people have gone “off the books” and toil in “the shadow economy” where there are fewer regulations for employers and no added expenses such as healthcare benefits and worker’s comp. How much are we talking about? As much as two trillion dollars.

“If the government managed to collect taxes on all that income, the deficit would be trivial,” the New Yorker’s James Surowiecki pointed out in an April column based on a conversation with Edgar L. Feige, a professor of economics emeritus at the University of Wisconsin-Madison who has been investigating the trend for 35 years.

“This unreported income is being earned, for the most part, not by drug dealers or Mob bosses but by tens of millions of people with run-of-the-mill jobs -- nannies, barbers, Web-site designers, and construction workers -- who are getting paid off the books. Ordinary Americans have gone underground, and, as the recovery continues to limp along, they seem to be doing it more and more.”

To be sure, there are costs to be paid by the majority of workers and employers who play by the rules but, as Surowiecki points out, “the size of the shadow economy means that our economy as a whole is probably doing better than we think.”
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