Investment Contrarians

Disposable Income Statistics 2013, Ongoing Decline in Disposable Income and Savings

Disposable Income Statistics 2013, Ongoing Decline in Disposable Income and Savings

The Congressional Budget Office expects the U.S. economy to remain moribund in 2013 and to exit the year with an unemployment rate of eight percent. The Federal Reserve has already dumped roughly $3.0 trillion into the U.S. economy and is adding $85.0 billion a month to that total.

In a nutshell, Americans are out of work, and their dollar doesn’t go as far as it used to. Consumer spending might have been the workhorse for economic growth, but those heady days are over.

That could spell doom for the U.S. economy. After all, American consumers are the most important factor when it comes to U.S. growth. When consumer spending increases, the U.S. economy grows; similarly, when consumer spending pulls back, we experience an economic slowdown.

In the decades since the 1960s, consumer spending has been an important contributing factor for growth. In the 1960s, consumer spending accounted for 61.8% of GDP. By 2010, it had climbed to 70.0%.15 Recession or not, consumer spending was, and is, a large part of the American economy.

Average annual share of GDP (percent) Consumer expenditure
1961-70 61.8
1971-80 62.5
1981-90 64.6
1991-2000 67.3
2001-10 70.0

© Lombardi Financial 2012; Data source: www.stlouisfed.org

For consumer spending to continue increasing, consumer income needs to increase. Economics 101 suggests that once a person earns more or has some savings, he or she will spend more. Unfortunately, this is not the way the economy is playing out. Any further pullback in consumer spending could quickly lead us back into a recession.

In September 2012, the real disposable income in the U.S. decreased by 0.1%. In August 2012, it declined 0.3%. At the same time, the U.S. personal savings rate is also retreating—down to 3.3% of disposable income in September compared to 3.7% in August.

Contrary to popular belief, since the beginning of the financial crisis, personal savings rates have been declining—not a good indicator for the U.S. economy. In November 2008, the savings rate for Americans was 6.5% of disposable income. Since that peak, savings as a percentage of real disposable income have fallen more than 49.0%!

Federal Reserve Bank of St. Louis

© Lombardi Financial 2012; Data source: Federal Reserve Bank of St. Louis

With current unemployment and inflation rates, consumers have no choice but to cut back on spending. As a result, consumer spending can no longer be the go-to engine for sustained growth in America.

The U.S. consumer cannot be relied upon to be the economic engine for other countries, either. Other countries rely heavily on U.S. purchases for their exports.

Until the employment picture changes drastically (i.e., we go from creating 150,000 jobs a month to 250,000 or 300,000 jobs a month), the economic slowdown in the U.S. will continue to accelerate throughout 2013.