Real personal income and spending are holding back (thank you, lower gas prices!) but still in line with the beginning of the recession

– by a New Deal Democrat

This morning’s November Personal Income and Expenditure report shows why I pay more attention to actual retail sales as a forecasting tool.

First, to the data: Personal income rose a nominal 0.3% in November, while nominal spending rose just 0.1%. Since the deflator for the month was 0.1%, this means that real income increased by 0.3% and real spending was unchanged. Since the end of stimulus spending in May 2021, real spending has risen 4.1%, while real incomes have fallen -1.7%:

The personal savings rate increased by 0.2% to 2.4%, which is slightly above its all-time lows, as shown in the chart below, which subtracts -2.4%, so the current count to show as 0:

Real personal income minus transfer receipts is one of the 4 monthly data series that the NBER heavily relies on in dating recessions. This increased in November and is less than -0.1% below its all-time high of just one year ago. The big drop in gas prices since June is a major driver of the recent improvement:

Which means the year-over-year reading is just under 0. Why is this important? Because in the past this indicator has only fallen to 0 or negative during – often at the end of – recessions:

This lag in the presentation of real income and expenses is why I pay more attention to real retail sales. Here’s a 50+ year look at year-over-year changes in real personal spending (blue) versus real retail sales (red):

Note that real retail sales *always* turned negative on an annualized basis before the recession started, while real personal spending either turned negative late or sometimes never at all.

Here’s what that looks like over the past 12 months:

Real retail sales have been steady to slightly negative since last March except for July and August, while real spending was still higher by 2.0% – although in the past such a low positive level has also corresponded to the start of a recession.

Currently, the labor market is the only segment of the economy that does not appear to be actively heading into recession.

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