“Read the directions and directly you will be directed in the right direction.” — Lewis Carroll
U.S. consumers have resumed their familiar pattern of spending after a seven-year interlude. They’re back to making purchases.
According to the Commerce Department, personal consumption expenditures (PCE)—the foremost indicator of consumer spending on goods and services in the U.S. economy—rose by $119.2 billion in April. This represents a 1% increase, marking the most significant monthly rise since August 2009, nearly seven years ago. This achievement certainly stands out.
Consumers function as the backbone of U.S. economic growth. In the absence of consumer spending, GDP stagnates—often leading to decline. Furthermore, within a debt-driven monetary system, when GDP falls, the entire structure of financial debt crumbles.
While we may hold a preference for a more transparent hard-money system that emphasizes savings and investment over borrowing and spending, our opinions do not alter the facts on the ground.
Considering the layers of complexity and superficiality in a debt-centered monetary framework, the news of PCE rising for the first time in nearly seven years piques our interest. Naturally, we ponder: Where is the funding for this increase coming from?
Where’s the Money Coming From?
Recall that middle-class incomes have remained stagnant, yielding a resounding “zero” over the past decade. In fact, they’ve been on a downward trajectory.
This troubling reality isn’t based merely on anecdotes overheard at your local café. Instead, it’s grounded in substantial data. Notably, our insights draw from recent findings presented by the Pew Research released earlier this month.
“The American middle class is losing ground in metropolitan areas across the country, affecting communities from Boston to Seattle and from Dallas to Milwaukee. From 2000 to 2014, the share of adults living in middle-income households diminished in 203 of the 229 U.S. metropolitan areas analyzed in a recent Pew Research Center assessment of government data. The decline in middle-class households was often significant, reaching 6 percentage points or more in 53 metropolitan areas, against a national drop of 4 points.”
If rising incomes aren’t driving the PCE increase, then what is? Insights from the New York Federal Reserve indicate that “total household debt rose by 1.1% in the first quarter to $12.25 trillion.” This is “the seventh consecutive quarterly increase, and the highest rise in mortgage debt since the onset of the Great Recession.”
Interestingly, while there were increases in auto and student loans, “credit card and home equity debts saw a decline.” Additionally, “total debt still remains over $400 billion lower than the peak seen in 2008.”
Guided By Nonsense
So, if neither increasing incomes nor rising consumer debt can account for the PCE growth, what can? One explanation could be that Americans are tapping into their savings.
According to the Wall Street Journal, “Americans had been saving money, but now seem to be feeling more confident. The personal saving rate in April was 5.4%, a decrease from March’s 5.9%, representing the lowest level of the year.”
This might offer some clarity; however, a contradiction arises when we consider a piece in the May issue of The Atlantic, aptly titled The Secret Shame of Middle-Class Americans. Essentially, the article cites a Federal Reserve survey indicating that nearly half of Americans would struggle to find $400 for an emergency.
If that’s accurate, how can consumers be drawing from their savings to enhance PCE? As things stand, a satisfactory explanation remains elusive.
One conclusion we can draw from this exploration is that economic studies and reports often present contradictory narratives. While one report suggests one trend, another counters it. They rarely provide clear guidance on whether to invest in Microsoft or Macy’s, but instead lead us through a convoluted maze of misleading information.
It’s this very complexity that shapes the Federal Reserve’s monetary policy. Metrics like income, employment, and inflation inform their decisions regarding the federal funds rate. It begs the question: why do they seem so indecisive? A recent comment from Fed Chair Janet Yellen illustrates this issue: “It’s appropriate, and I’ve mentioned it before, for the Fed to gradually and cautiously raise our overnight interest rate over time. A move like that would likely be suitable in the coming months.”
Much like our analysis and the data they rely on, the Fed’s statements often reflect a puzzling inconsistency.
In conclusion, the financial landscape is rife with contradictions and confusion. While economic indicators may suggest a rebound in consumer spending, the underlying realities raise important questions about sustainability and genuine growth.
Sincerely,
MN Gordon
for Economic Prism