Although disposable income declined in August, an uptick in consumer spending bodes well for retailers gearing up for the holiday shopping season even though there might be clouds ahead.
The Bureau of Economic Analysis said personal consumption expenditures for the month showed a 0.4 percent gain (adjusted for inflation), which is up from a 0.3 percent gain in July. Disposable income posted a 0.3 percent increase in August, which is down from a 0.4 percent rise in July. Results were in line with expectations.
Although wages and salaries increased by $35.6 billion in the month, that was less than July’s $43.8 billion gain. Still, consumers doled out more money in the month as net personal outlays, which include personal spending, interest rates and transfer payments, increased by $55.2 billion, compared to a gain of $46 billion in July. Consumers also managed to maintain their savings habit as the personal savings rate came in at 4.6 percent as compared to 4.7 percent in July.
Combined, the data show an improved consumer spending environment compared to prior months, and indicate the economy is well-positioned for the all-important fourth-quarter holiday shopping season.
In a separate report by Telsey Advisory Group, the analysts at the firm tracked 15 economic data points to “evaluate the health of the economy and the consumer.” After crunching the numbers, eight of the indicators showed improving fundamentals while five were “still positive, but with a decelerating trend, and only [two] indicators in negative territory.” The firm also examined other data sets such as personal savings, housing costs, demographic trends and consumer debt.
“Our review of U.S. economic trends leads us to believe that the U.S. consumer is in good health — rising income, higher savings and asset appreciation — which should continue to spur consumer spending in [the second half of 2015] and into 2016,” the analysts said. “The strongest force behind our confidence is the continued job market recovery, which, combined with rising wages, has resulted in personal income growth of 4.3 percent year-over-year.”
Combined with the personal savings rate previously mentioned, consumers are poised to spend. “That said, seasonal holiday hiring is expected to be flattish as retailers have added jobs over the year, and are hiring more in non-store areas such as e-commerce,” the analysts said. “We believe the lower-end consumer spending should benefit from several tailwinds including commodity costs and employment, while the higher-end consumer spending, although impacted by the global crisis, we believe will be generally fine.”
The analysts said the condition of the housing sector “is at the center of the economic recovery, and has continued its strength in August.” As a result, real estate appreciation will continue to add to consumers’ net worth. Still, credit remains tight as applicants in the loan origination market have poorer credit scores.
“These macro trends, combined with solid consumer confidence, keeps us optimistic about the holiday season, especially given efforts to offer differentiated products, increase digital penetration and bolster service,” the Telsey analysts concluded.
There is one looming downside, according to at least one economist: a government shutdown. Even as some observers said the impending departure of Speaker of the House John Boehner may delay a government shutdown, Chris Christopher, director of consumer economics at IHS Global Insight, said ongoing fighting between elected officials could dampen shoppers’ moods.
“There is considerable downside risk to our holiday retail sales, discretionary consumer spending and consumer confidence outlook due to a possible government shutdown,” he said. “Even if a government shutdown is avoided, political bickering and finger-pointing are a major downer for consumer confidence.”
Regarding today’s expenditure report, Christopher noted that consumer confidence “has not held up very well with all the volatility in the equity markets, but confidence does not seem to be impacting spending so far.”
“Lower energy prices and a stronger dollar are a big plus for most U.S. consumers since the gasoline price dividend assists in promoting spending on other items,” Christopher explained. “The stronger dollar reduces the prices of imported consumer goods. However, in those areas of the country that are energy- or export-centric, times are not so good: areas in West Texas, Oklahoma, New Mexico and North Dakota are feeling the lower energy price pinch.”
Christopher also sees volatility on Wall Street as creating a more cautious spending trend for luxury, but said, “It is real estate wealth held by households that matters more for overall consumer spending.”
The economist said the consumer spending outlook for the “remainder of the year looks relatively bright, supported by improved job prospects, solid gains in real disposable income, modest consumer price inflation and a housing market that is gaining traction.”
IHS Global Insight’s outlook for holiday retail sales calls for a 3.5 percent year-over-year gain. “Not as strong as last year’s growth rate, but a solid showing,” Christopher said.