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It's All About Context...Consumer Spending

Last time, we discovered that the key driver of U.S. economic growth or GDP was consumer spending, which represents over two-thirds of the economy. The key question, then, is whether it is reasonable to think that consumer spending—and therefore the economic recovery—will continue? Let’s examine the data and facts.

The chart below shows that disposable personal income (DPI) and personal outlays (spending) dipped sharply during the 2008-09 recession and personal savings sky rocketed.1 The Bureau of Economic Analysis (BEA) reports that as of June 2012, DPI increased 3.2% (dark gray line) and spending increased 3.6% (black line) compared to June 2011, which are approximately the pre-recession growth rates. In addition, the personal savings rate (lighter gray line) has been trending lower and is reverting back to “normal” as consumers regain confidence.


There is a widely accepted “new normal” hypothesis that consumer spending would be substantially constrained during this economic recovery. Well, the recovery in monthly retail spending—and therefore monthly retail sales—has surpassed the pre-recession high.2 Again, the facts just don’t support the “new normal” and what’s generally heard in the media.

So, what is driving the income and spending recovery?

The chart below shows the sources of consumer income.1 The data reveals that the rising tide of income is principally driven by rising monthly paychecks (red line). Rising employment, hours worked and small wage gains are behind rising employee compensation. (Note: unemployment insurance payments are down 43% from the peak in January 2010).


While much is made about home prices, net equity in real estate accounts for only 11% of household net worth. Of course, no one wants to be “under water” in the value of their home. The point, however, is that home prices have little affect on consumer spending behavior.

Something that is driving consumer behavior is the Consumers’ Financial Obligations Ratio (CFOR). The CFOR compares monthly flow of household income to fixed recurring monthly expenses, including debt service, and gives a more accurate measure of consumers’ financial health. As shown in this chart, consumers’ ability to cover the monthly “nut” has seldom been better in nearly 20 years. With CFOR at 16.0%, this means that households have 84% of after-tax income to spend on all other monthly purchases.3


Rising household incomes, lower household debt and low interest rates are likely to continue fueling consumer spending and therefore GDP growth. There will be fluctuations in weekly, monthly and quarterly results, but the data suggests that the key factor that drives the US economy (rising household income) continues to improve overall.

The media pundits and noisemakers with their constant sound bites and partial truths would have you believe the economy is a wreck and the majority of consumers are hurting. By examining the facts and actual numbers, you can see the trends you can compare and contrast against previous periods, and you can put things in proper context. Like most of the U.S. population, you likely have an opinion and feel a certain way about the economic recovery. You may even find evidence to support your opinion and feelings. Still, the facts are the facts—regardless of how we would want them to be.

I will admit that I—as well as other professionals—have certain feelings, opinions and experiences that could cloud our judgment. We are human. However, because of our professionalism and unwavering loyalty to do what is always in the best interest our clients, we’ve learned to set aside our emotional biases and examine the facts. Doing so allows us to offer an objective, rational recommendation.


1. Bureau of Economic Analysis, data through June 2102.
2. U.S. Census Bureau; data through July 2012.
3. Federal Reserve, data through March 2012; released June 22, 2012.

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