Where does the money come from? They have now outpaced inflation, earned interest income, and their value has ballooned into their assets over the years.
By Wolf Richter for WOLF STREET.
Consumer spending, adjusted for inflation and seasonal factors, rose 0.5% in April from March, after two months of declines and a sharp increase in January.
Inflation-adjusted consumer spending rose 2.3% from a year ago, compared to the average growth rate in 2019 (2.4%). Americans continue to do what they do best: spend money and defy inflation.
To monitor the month-to-month zigzags and see the trend, we look at the three-month moving average of inflation-adjusted, aka “real” consumer spending: It’s been on a regular-ish Good-Times rise. Despite being plagued by inflation, high interest rates, the credit crunch, news of layoffs and banking turmoil, consumers have picked up pace this year, showing a slight slowdown in the chart from late last year.
Now you are done with inflation. Adjusted for inflation, aka “real” personal income rose 0.2% in April from March and 1.2% year-over-year, the biggest year-over-year increase in 13 months.
This is “real” income from all sources – including interest and dividend income and rental income – But excluding transfer fees (Social security, unemployment insurance, etc.).
They received the biggest pay rise in decades. And they hold trillions of dollars in CDs, Treasury bills and money market funds that now earn 5% and more, up from 0.2% two years ago. And this sudden interest income adds to the total.
You can see how inflation has outpaced personal income for most of 2022 and early this year, and how “real” income has declined over that period. But over the past two months, “real” earnings have rebounded, and hit a new record in April.
They usually don’t borrow this money on their credit cards..
They spent less and less of their vast wealth.. Excluding transfer fees, real incomes (+1.2% year-on-year) increased more slowly than real costs (+2.3%). Much of the difference comes from the wealth Americans have, especially the big spenders who move the spending needle.
Capital gains, property sales, and cash flows from maturing CDs and bonds are not included in the income figure here. Withdrawals from brokerage accounts to spend on household items or travel are also not included in the income figure. Those property bills have increased in property values over the past decade, and people are gravitating to them. This is especially the case for many retirees.
When spending exceeds income, this is borrowed money, and it is nonsense to think that people are creating more consumer debt to spend this money. In sum, people are not narrowly tapping into their “savings.” They are using the profits on their property, and those profits are not reflected in the income figures. But extracting even a small portion of these profits will show up in the cost figures.
They mostly use their credit cards as a payment method, not as a borrowing method.. Over the past 12 months, consumer spending in nominal terms, unadjusted for inflation, increased by $1.15 trillion. In April, consumers spent an annualized $18.3 trillion. These are big numbers!
In the same period, credit cards and other revolving credits increased by only 153 billion dollars, and a large part of that increase is paid on the next month’s payment date and does not incur interest, although it appears on the balance sheet of the previous month.
Americans spend $5 trillion a year on their credit cards as a payment method, collect 1% or 2% cash back or get travel credit or whatever, and most pay off those balances every month and never pay interest. on them.
And spending on credit cards has soared this year, especially on travel and “experiences” — experiences like Taylor Swift concert tickets that cost thousands of dollars each. WSJ had a piece on that. Like drunken sailors.
The increase in travel has been confirmed by card companies including AmEx. In practice, all this is paid by card for the expenses of trips and experiences. But in Q1, credit card balances declined as a percentage of disposable income, thanks to rising incomes and the fact that more cardholders are paying off their cards every month. Here we have discussed in detail about credit cards.
By category cost, adjusted for inflation.
Expenditure on services, adjusted for inflationIt grew by 0.3% month-on-month and 2.7% year-on-year, exceeding the 2.3% five-year average growth in 2015-2019, partly due to increased spending on travel and experiences.
Services accounted for 61.9 percent of total consumer spending in April. Apart from Taylor Swift tickets, it also includes accommodation, utilities, all types of insurance, health care, travel bookings, streaming, bookings, repairs, cleaning services, hairdressers, etc.
Here is a three-month moving average to smooth out month-to-month zigzags and show the trend. Note the flat spot at the end of last year, and the growing growth this year, all adjusted for inflation:
Spending on durable goods, adjusted for inflationAfter two months of decline, it jumped 1.4% in April from March and is up 2.6% year over year. This includes new and used vehicles, appliances, furniture, electronics, tools, etc.
The three-month average in April shows a combination of February and March dips and April rises. The three-month average was up 2.6 percent from a year earlier. Interestingly, Americans are still buying durable goods at levels well above the pre-pandemic trend (green line) after the spike during the stimulus.
Expenditure on goods adjusted for inflation, jumped 0.4% for the month, but was only 0.8% year-over-year. This includes food, fuel, clothing, shoes and supplies. The three-month moving average is still above the pre-pandemic trend.
Not even the banking crisis and the “credit crunch” or anything that slowed them down.
April was the first month to reflect consumer spending during the banking crisis that began in mid-March, triggering tighter lending conditions — a “credit crunch” — that depressed consumer spending, according to Fed officials from Powell. They proposed that
But that didn’t happen. Consumers aren’t feeling down, they’re getting more cash from their labor, 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 are spending this money. And they are destroying some of their assets that they have acquired over the past 10 years.
And the tightest credit conditions, if any, have not slowed them down at all. Even if you hate this inflation, get used to it. You only live once. This inflation is now a part of it, so the cost must go on, or watered down by inflation, higher borrowing costs, loan defaults, endless layoff announcements, and banking chaos.
As consumers push this harder, inflation is bound to rise again, as measured by the Fed’s preferred core PCE price index, services inflation reaccelerates and motor vehicle prices suddenly jump.
Failure to collect debt related to income.
And for those worried that households are saddled with unaffordable debt, here is total household debt as a percentage of household income, according to data from the New York Fed. It includes housing debt. Note the catch at the end; That’s because total household debt rose 0.9% in Q1 from Q4, but disposable income (payroll minus taxes) jumped 3.0% — both in nominal terms:
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