Consumer Spending Stinks Like a Dead Fish

Economic data come and go. Most of them don’t tell you much or, more often than not, they effectively reinforce your thinking on the direction of the economy. However, every so often, a piece of data arrives with the thud and the stink of a dead fish. And the smell just lingers, making you very uncomfortable. Case in point: Consumer spending grew much less than forecast in May.

As a result, consumer spending for the quarter, presumably one of the big drivers of GDP growth, is going to be subpar. Overall GDP growth for the second quarter will end up being marked down meaningfully, after just having been marked up over the last few weeks. This is especially problematic given that 1Q14 was an utter disaster from a growth standpoint. The markets were counting on the catch-up growth in the second quarter to make the whole year modestly respectable. Alas!

In my view, this is just another data point that tells us that although the drag from household deleveraging is done, the economic growth trajectory is still contingent on income growth (wage inflation), which is still at very modest levels. Higher asset prices help increase consumption for higher income folks, but with modest income growth–and very low levels of consumer credit growth–the raw ingredients for a meaningful recovery in consumption are still missing.

As long as that is the case, growth is going to be modest and rates will remain low.



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