Total Income - Savings = Capacity for Consumption
The simplicity of the above identity belies the gravity of the economic impact it holds for a domestic economy still beholden to consumption for 70% of GDP.
Today’s preliminary estimates from the BEA showed Personal Income and Spending both grew 0.1% MoM in July while the Saving Rate held at 4.4%.
On the income side, both personal and disposable income growth decelerated MoM but accelerated modestly on a YoY basis with Government sourced income serving as a discrete drag on DPI.
On the spending side, spending growth on Non-durables accelerated on both a MoM and YoY basis while decelerating for both Services and Durables on that same basis. (see table below for a detailed breakdown).
We weren’t expecting upside in either metric and wouldn’t view today’s numbers as surprising nor necessarily negative.
We’ve highlighted that upside in income growth, and consumer spending growth by extension, in 3Q13 would be constrained (i.e. positive, but hard to model any material incremental acceleration) primarily by negative government salary and wage growth driven by the combination of ongoing job loss at the federal level and the implementation of furloughs for some 700K+ employees which began in July.
In its release of the personal income data, the BEA breaks salary & wage data down into private & government components. The government figure is an aggregate number (Federal + State + Local) that doesn’t parse the federal component separately – complicating getting a clean read on sequestrations impacts on income in isolation. On balance, however, growth in aggregate government sourced income is tracking in line with expectations.
Previously (Consumption Check - Is Good, Good Enough?) we estimated aggregate government salary and wage income would decline 1.0% YoY in 3Q13. The first, preliminary data point for 3Q13 shows income from government declining -54bps MoM and -41bps YoY – accelerating -40bps sequentially from -0.0% YoY growth estimated in June. The math underneath our baseline estimate, which we reprise below, is fairly straightforward:
There are currently 2.75M federal employees, which represents 2.0% of the NFP workforce. A continuation of current trends in Federal government employment growth alongside a 20% paycut for ~27% of the Federal workforce equates to a 7.2% decline in aggregate pre-tax income YoY. Stated different, the collective impact of the furloughs and employment growth at the federal level should equate to a ~7% decline in income for 2% of the total workforce as we move through 3Q.
State & Local government employment growth went positive in May for the first time in 5 years. Continued, positive job growth at the state/local level could serve as an offset to accelerating declines in federal employment and income growth. Collectively, Federal, State, & Local government employment currently represents 16.1% of total payrolls. Layering on an assumption of modest, but accelerating state & local gov’t employment growth to the furlough and employment related pressure at the Federal level, the net impact is ~1.2% negative aggregate income growth for 16% of the employment base.
In short, negative income growth for 16% of the workforce will serve to constrain the potential for acceleration in personal disposable income growth, and aggregate consumption growth by extension, in 3Q13.
To put today’s data in slightly broader context: The labor market data has been positive as the trajectory in the Initial Jobless claims data has been excellent and BLS reported employment gains have been moderate-to-good.
Hours worked has been largely flat, nominal and real wage growth in the private sector has been muted, federal government employment growth remains in retreat (offset by state & local employment growth which has now gone positive after 5 years of negative growth) and fiscal policy will remain a discrete drag over the balance of the fiscal year.
On average, the domestic macro data remains good on an absolute basis and is still better than good relative to other sovereigns – which keeps the “is good, good enough?” question a relevant one as it relates to domestic equity exposure.
Alongside decent economic data and the still nascent phase shift in capital flows to equities (US equities in particular), will the market continue to look past middling consumer spending growth over the next few months with an eye towards a diminishing fiscal drag and easy compares as we annualize the sequestration and the tax law changes in early 2014? At present, we’re still leaning towards yes.
Domestic #GrowthAccelerating out of the 4Q12 trough has played out thus far in 2013 and, while we still like the intermediate term outlook for U.S. growth, the arb vs. consensus growth expectations isn’t overly asymmetric here and growth in consumption faces some constraints in the immediate term.
From an investment perspective, we still like domestic, pro-growth style factor exposure, but we’re not expecting much upside in the reported consumer income/spending data in the very near term.
Christian B. Drake