Despite being battered by banking turmoil, news of layoffs, the credit crunch, high interest rates and inflation, our drunken sailors have spent more, even adjusted for inflation.

by sandhyajihomesinc · 28 May 2023

Where does the money come from? They are now outperforming inflation, earning interest income, and dipping into their assets whose prices have inflated over the years.

By Wolf Richter for WOLF STREET.

Consumer spending, adjusted for inflation and seasonal factors, jumped 0.5% in April from March, after two months of decline and a big rise in January.

Compared to last year, after adjusting for inflation, consumer spending increased by a steady 2.3%, in line with the average growth rate in 2019 (2.4%). Americans continue to do what they do best: spend money, and they spend more than inflation is just fine.

To cap the month-to-month zigzags and see the trend, we look at a three-month moving average of inflation-adjusted “real” consumer spending: it was in a normal uptrend in the good times: although they were hit by inflation, rising interest rates, the credit crunch, Layoff news, banking turmoil, but consumers have picked up the pace so far this year, after a slight slowdown late last year which you can see in the chart:

Now they are outperforming inflation. After adjusting for inflation, “real” personal income increased by 0.2% in April from March and by 1.2% year-on-year, the largest annual increase in 13 months.

This “real” income comes from all sources – including interest income, dividends and rental income – But excluding transfer payments (Social Security, unemployment insurance, etc.).

They got the biggest pay increases in decades. And they have trillions of dollars worth of CDs, Treasury bills and money market funds, which are now earning 5% and more, instead of 0.2% two years ago. And this sudden surge in interest income raises their total income.

You can see how inflation has outpaced personal income for most of 2022 and into early this year, and “real” income has fallen in that time. But over the past two months, “real” incomes have risen again, setting a new record in April:

Mostly they did not borrow this money from their credit cards.

They spent little of their enormous asset gains. Real income without transfer payments (+1.2% yoy) rose more slowly than real spending (+2.3%). Most of the spread is derived from the wealth in assets that Americans own, especially the big spenders who move the spending needle.

Capital gains, asset sales, cash flows from CDs and bonds payable are not included in the income figures here. Withdrawing money from brokerage accounts to spend on furniture or a trip is not included in the income figures either. Over the past decade, these asset accounts have swelled as asset prices have risen, and people are counting on them. This is especially the case for the large number of retirees.

It doesn’t make sense to assume that when spending exceeds income, that’s borrowed money, and that people take on more consumer debt to spend that money (although few people do). In the aggregate, people do not indulge their “savings” in the narrow sense. They use the gains from their assets, and those gains don’t show up in the income figures; But spending a small fraction of those gains shows up in the spending numbers.

They mostly used their credit cards as a payment method, not as a way to borrow. Over the past 12 months, consumer spending in nominal terms, and therefore not adjusted for inflation, has increased by $1.15 trillion. In April, consumers spent an annual rate of $18.3 trillion. These are huge numbers!

Over the same period, credit card and other revolving credit balances increased by just $153 billion, and much of that increase is paid off at the next month’s due date and incurs no interest, even though it appears in the priority month’s balances.

Americans manage about $5 trillion a year spending with their credit cards as a payment method, collecting 1% or 2% cash back or getting a mileage credit or whatever, and most of them pay off those balances every month and never pay interest on them.

Credit card spending has skyrocketed this year, particularly on trips and “experiences” — experiences like Taylor Swift’s concert tickets bought from corporate speculators for thousands of dollars each. The Wall Street Journal had a piece on that. Like drunken sailors.

Card companies, including AmEx, confirmed increased travel. Virtually all of this spending on excursions and experiences is paid for by cards. However, in the first quarter, credit card balances as a percentage of disposable income actually declined, thanks to higher income and thanks to the fact that the majority of cardholders pay off their cards each month. We have discussed credit cards in detail here.

Spending by category, adjusted for inflation.

Spending on services adjusted for inflationrose 0.3% for the month and 2.7% year-over-year, outperforming the five-year average growth in 2015-2019 of 2.3%, driven in part by increases in spending on flights and experiences.

Services accounted for 61.9% of total consumer spending in April. In addition to Taylor Swift tickets, they include housing, utilities, insurance of all kinds, healthcare, travel and streaming reservations, subscriptions, repairs, cleaning services, haircuts, and so on.

To smooth out the month-to-month zigzags and show the trend, here’s the 3-month moving average. Note the near-flat point late last year, and the exponential growth this year, all adjusted for inflation:

Expenditure on durable goods adjusted for inflation, it jumped 1.4% in April from March, after two months of decline, and was up 2.6% year over year. This includes new and used cars, appliances, furniture, electronics, gadgets, and so on.

The April 3-month moving average shows a combination of decreases in February and March and an increase in April. The three-month average was also up 2.6% from a year ago. It’s amazing that Americans, after a huge spike during the stimulus phase, are still buying durable goods at a much higher rate than the pre-pandemic trend (green line):

Spending on non-durable goods, adjusted for inflation, jumped 0.4% for the month, but year-over-year it was up just 0.8%. This includes food, fuel, clothing, shoes, and supplies. The 3-month moving average remains well above the pre-pandemic trend:

Not even banking turmoil and the “credit crunch” or whatever slowed them down.

April was the first month to reflect consumer spending during the banking turmoil that began in mid-March, which was supposed to lead to tougher credit conditions — a “credit crunch” — that would slow consumer spending, Fed officials said. from Powell. you have a suggestion.

But this did not happen. Consumers are in no mood to slow down, they’re making more money from their work, and they’re earning more interest on CDs, money market funds, savings accounts and treasury bills – 5% instead of 0.2% two years ago. And they spend this money. They are spending some of their asset gains from the past ten years.

And tighter credit terms, if anything, haven’t slowed it down at all. Although they hate this inflation, they are used to it, and you only live once, and that inflation is now part of it, and spending must continue, or it declines or the water level rises in the form of inflation, high borrowing costs, and credit. Crisis, endless layoff announcements, banking turmoil.

Inevitably, with consumers pushing this hard, inflation accelerated again, as measured by the Fed’s preferred core PCE price index, amid accelerating service inflation and a sudden jump in auto prices.

Do not accumulate debt in relation to income.

And just for those worried about households taking on debt they can’t afford, here’s total household debt as a percentage of household disposable income, based on data from the Federal Reserve Bank of New York. It includes housing debt. Note the dip at the end; This happened because total household debt rose 0.9% in the first quarter from the fourth quarter, but disposable income (income minus payroll taxes) jumped 3.0% — both in nominal terms: