Since January 2007, personal consumption expenditures hit their YOY peak in growth in November 2007 and have since grown at a moderated to declining rate. Nondurable goods spending has helped to support total PCE growth as gasoline, fuel oil and other energy spending picked up in September 2007 and began to really accelerate in October followed by four months of 30%-plus YOY increases. Energy spending continued to grow at double-digit rates since that period through July as gasoline prices hit historical highs.
At the same time energy costs took a larger share of wallet, consumers were hit with overall inflationary pressures as CPI reflected these higher energy costs and began its steady YOY increase in August 2007. The unemployment rate, which has been on an upward trend since January 2007, also began to increase at a more significant pace during this October to November 2007 timeframe. Not surprising, disposable personal income growth decelerated in October as well as it coincided with the uptick in unemployment rates. Since then, disposable income growth has continued to moderate until it turned relatively flat in March 2008. The government’s rebate checks helped to boost numbers in May (also provided a lift to May, June, July retail sales numbers), but this government intervention only provided a short-term fix and disposable income growth has since abated. So needless to say, consumers were already under pressure in the year-ago October period. These pressures, however, were only beginning to emerge, albeit at a fairly rapid pace, so it is safe to assume that consumers had not fully realized the severity of the issues.
As we think about October 2008 retail sales, consumer confidence has waned on a YOY basis, unemployment rates have worsened and disposable personal incomes have deteriorated further. The consumer has gotten some relief in recent months as it relates to gasoline prices and overall inflationary pressures, but as I said earlier, we are anticipating another month of toxic results and as Brian McGough stated on October 12, discretionary spending could finally turn negative in 1Q09 and be down about $170 billion in FY09.