Consumer spending represents 70% of GDP and the overall financial health of many consumers has gradually deteriorated during the last two years. Wages grew just 2% on average in 2011 and 2012, less than the increase in the cost of living. Real per capita disposable income has shrunk by 0.4% at an annualized rate over the past five years. That is the worst reading since this data series began in 1964, according to the Bureau of Economic Analysis. Since 2002 median income has declined 9.1%, falling from $56,438 to $51,320 in March 2013. According to Sentier Research, since the recovery began in June 2009, disposable income has fallen from $54,275 to $51,320, a drop of 5.4%, which only reinforces how subpar this recovery has been.
Only 88,000 jobs were created in March, which was far below the gain of 268,000 in February. We suspect the March report overstated the degree of weakness, which implies a better number is likely when the figures for April are reported in early May. That said there was not much to like in the March report. Nearly 500,000 Americans dropped out of the labor force, the biggest one-month decline since December 2009. The participation rate measures the number of people who are working or looking for work. In March the participation rate fell to 63.3%, the lowest since 1979. There is no question that demographics are playing a role as out-of-work baby boomers choose to retire. However, this only explains about 60% of the decline in the participation rate. The participation rate for workers 25-54, considered prime-age-workers, was 81.3% in March, the lowest since 1984. When the recession began in January 2008, the participation rate for those under 25 was 60%, but was down to 55% in March. There are a lot of college graduates who have a diploma, an average of $25,000 in student loans, and are working at Starbucks. According to MFR, Inc., the unemployment rate would be over 11%, if the participation rate was at its 2007 level of 66%. There are 7.6 million workers who are working part time, but want a full-time job. The U-6 rate was 13.8% in March, which includes those seeking a full time job and those who have given up looking. The labor market continues to grow at a rate that is not likely to boost wage growth or bring the level of underemployment and unemployment down in a meaningful way in coming months. This suggests the odds do not favor a significant improvement in consumer spending before year end.
The American consumer has often been considered a spendthrift, but that has not always been the case. Between 1958 and 1988, the average savings rate was over 8%. Despite the roaring bull market of the 1990’s and the housing boom until 2007, the average savings rate declined until it was below 2.0% in 2006. In the first quarter of 2011, the savings rate had improved to 5.4%. In another reflection of weak income and job growth over the last two years, the savings rate fell to 2.6% in February. Consumers have been dipping into their savings since early 2011, which could make it difficult for savings to support an increase in spending in the second half of 2013.
