Monday, August 30, 2010

Incomes and spending are improving

The government's ability to measure income and spending is subject to lags, revisions, and estimates—so I don't tend to pay too much attention to data on personal income and spending. It's better to use real-time pricing data—such as commodity prices—to see what is going on with supply and demand on the margin. Nevertheless, I post these charts of growth in real personal income and spending because they show that the economy has clearly been in recovery mode for the past year, and there is no sign in these numbers of a double-dip recession.

Skeptics will point out that both consumption spending and incomes have been bolstered by hundreds of billions in transfer payments, so they overstate the true strength of the economy. I would counter by noting that transfer payments by definition involve taking money from one person's pocket and putting it into another's. One person can spend more, but the other has to spend less. From a macro point of view, this is a wash, so these numbers are, I think, a legitimate approximation of what is really going on in the economy: a modest recovery from a fairly deep recession.

Skeptics will also point out that the savings rate has increased significantly—from 2% of disposable income to 6%—over the past three years and that is sapping some of the economy's strength. I would counter by noting that whatever one person saves, another person must perforce spend; people no longer save by stuffing money under their mattress, they put the money into a bank, for example, and the bank then lends that money to someone else who then spends it. An increased savings rate doesn't mean less spending overall, it means that spending is being redirected, away from typical consumption items to, presumably, things which are likely to boost the economy's productivity.

1 comment:

brodero said...

While I agree with you that one person's saving is another person's
spending there is a lag time with
that event and that is what we are seeing right now but the spending (
or lending) will emerge the question is when....since the savings rate averaged 7.5% from 1980 to 1995....we are getting closer....