Personal income has trended lower in recent months, which has kept a lid on spending according to a report released last week by the U.S. Bureau of Economic Analysis. Personal income fell 0.1 percent in August compared with July. Wage income, an important component of personal income, fell 0.2 percent, not surprising in light of the weak labor market. Personal consumption expenditures managed a weak gain of 0.2 percent last month as consumers trimmed their savings rate in order to continue spending. Real (inflation-adjusted) expenditures were flat, however, as inflation rose 0.2 percent.
Given recent declines in consumer confidence, it is surprising that consumer spending has not fallen further. Weak spending augers poorly for retailers, but upscale retailers have fared better than some discounters as their customers are more likely to be college graduates with lower unemployment rates and higher incomes. Weak spending raises a yellow flag for the economy because consumers account for 70 percent of total GDP. Fortunately, consumers have not thrown in the towel yet, and their willingness to keep spending even at modest levels will be crucial to keeping a near-term recession at bay.