Fisher Investments Editorial Staff
US Economy

Retail Therapy

By, 08/31/2010
Story Highlights:

  • US consumer spending in Q2 and the first month of Q3 grew faster than expected, despite fears elevated unemployment would hold it back.
  • Consumption relies on income growth, and income growth is outpacing consumption growth so far this year.
  • It isn't the recovery's primary driver, but rather a nice additional tailwind behind continued gangbusters business spending growth.

______________________________________________________________________

Stocks kicked off the week with a down Monday over two disappointments: 1) The Bank of Japan (BOJ) increased liquidity available to banks, but failed to engage in further quantitative easing, and 2) US personal income growth missed expectations. No disrespect to the land of the rising sun, but it's never a giant shock when a BOJ policy pronouncement fails to wow the crowd. And lost in the kerfuffle over "disappointing" income growth (which was still positive—last we checked, growing incomes are overall a good thing) was the news US consumer spending grew more than expected in July (+0.4%).

Of course, we'd caution against focusing too much on monthly data (for any metric) since it can be volatile and is prone to revision. But it's not just July—this latest growth adds to a lengthening trend of positive consumer spending data. The Bureau of Economic Analysis's first revision of Q2 US GDP beat expectations, thanks largely to better-than-expected private consumption (up 2.0% from 1.6%).

With high unemployment, how is it possible consumers are spending more? Well, income—historically a strong predictor of consumer spending—is growing too. Worried headlines predicted that since July personal income growth lagged consumer spending growth, future consumption growth would be limited. Fair enough. But income growth outpaced consumption growth in April, May, June, and in aggregate from January through July. Plus, the relatively high savings rate over the past two years means income growth needn't exceed consumption growth to support continued recovery. And let's not forget incomes are on the up and up generally—good news in its own right.

Rebounding consumer spending is great, but remember: Consumer spending doesn't have far to go in recovery—because it didn't fall much to begin with. It isn't the economic recovery's primary driver, but rather a nice additional tailwind behind continued gangbusters business spending growth.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:



*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.