The government's Personal Income and Outlays report for September bore more evidence of a slowing economy. Consumer spending rose by only 0.1 percent, trailing expectations of 0.2 percent. That's troubling news, given that the optimists believe that strong consumer spending will supposedly drive stronger fourth-quarter economic growth.
Lucia Mutikani's coverage at Reuters made a common error in explaining the importance of consumer spending, made a significant technical error in describing the report's contents, and ignored a very disturbing item present in the government report's detail (related items are tagged [1], [2] and [3], respectively, in the excerpt following the jump; bolds are mine):
U.S. consumer spending posts smallest rise in eight months
U.S. consumer spending in September recorded its smallest gain in eight months as income barely rose, suggesting some cooling in domestic demand after recent hefty increases.
The Commerce Department said on Friday consumer spending edged up 0.1 percent after an unrevised 0.4 percent rise in August. Consumer spending accounts for more than two-thirds of U.S. economic activity. [1]
September's consumer spending data was included in Thursday's third-quarter gross domestic product report. [2] Consumer spending rose at a brisk 3.2 percent annual pace in the third quarter, helping to lift GDP growth to a 1.5 percent rate.
Growth in the third quarter was constrained by business efforts to whittle down an inventory bloat, a strong dollar and ongoing spending cuts by energy companies.
... Personal income ticked up 0.1 percent in September, the smallest rise since March, [3] after increasing 0.4 percent in the prior month. With spending sluggish, inflation remained benign in September.
Notes:
[1] — Consumer spending makes up about two-thirds of gross domestic product as it is compiled, but the mere act of spending money (or borrowing money while purchasing items) is hardly the only "economic activity" involved. Mutikani and other business writers act as if the goods somehow just show up on the shelves and get bought. Obviously, that's not true. Producers and service providers have to obtain what they need to produce items or render services. Producers must put forth the effort to produce components and assemble them into something useful, and transport them to their destination.
This is hardly a distinction without a difference. The Obama administration's economic policymakers, Keynesians that they are, obsess over consumer spending and try to figure out ways to "stimulate" it to increase reported GDP. This can make the economic situation appear acceptable for a while. But in the process, policymakers give inadequate consideration to making it easier and less expensive for producers to make the things people consume and buy.
We are seeing the results of almost seven years of the Keynesian mindset in data showing stagnation in the economy's foundations. Industrial production, orders for and shipments of durable and other manufactured goods, and wholesale trade sales have been flat or declining for periods ranging from the past six to the past 11 months. The economy has shown historically slow growth since the recession ended. The more recent declines in key metrics would seem to indicate that the deteriorating is getting more serious.
Mutikani's and other reporters' blithe and incorrection assertions that consumer spending is "two-thirds of (all) U.S. economic activity" feeds the false and dangerous Keynesian mythology that consumption is all that really matters.
[2] — Only the specific data relating to consumer spending on goods was included in Thursday's GDP report, which showed that the economy grew by an annualized 1.5 percent in the third quarter. A technical note to the GDP report specifically states the following:
The advance GDP estimate for the third quarter of 2015 is based on source data that are incomplete and subject to revision. Three months of source data were available for consumer spending on goods; shipments of capital equipment; motor vehicle sales and inventories; durable goods manufacturing inventories; exports and imports of goods; federal government outlays; and consumer, producer, and international prices.
Thus, we can infer that three months of source data was not available for consumer spending on services, which comprise roughly two-thirds of all personal consumption expenditures, and about 46 percent of GDP (in Thursday's report in today's dollars, annualized GDP came in at $18.035 trillion; annualized PCE was $12.364 trillion; services totaled $8.344 trillion).
But just in case I might be missing something, I had a phone conversation with an official at the BEA this morning, during which I confirmed that services-related PCE in the first and second versions of the government's GDP reports is estimated, and that genuine source data in the this area is not available for inclusion until the third version. This person pointed me to a spreadsheet which makes 21 separate assumptions tied to alternative data sources. These give the bureau an approximation of the value of PCE services components for its first two rounds of reporting. A link to that spreadsheet is found here; scroll down to "Supplemental Estimates"; the Excel sheet is on the line labeled "Key source data and assumptions for 'advance' estimate."
Mutikani should contact me by clicking on the email link at the top of my home blog's home page to let me know where I should send the bill for reporting services rendered.
[3] — The Reuters reporter's statement is true, but Mutikani apparently made no effort to identify what caused the personal income advance to be so small. Zero Hedge did, and found a troubling red flag. ZH should also bill Reuters for value-added services.
Recovery Wrecked: American Employee Compensation Dropped In September For The First Time Since July 2013
Despite all the promises, all the surveys, all the expectations that wage growth is coming (any minute now), September crushed the hopes (and changes) and dreams of Americans as, for the first time since July 2013, Compensation of Employees fell month-over-month.
Immediately available data shows that seasonally adjusted monthly increases in wages and salaries averaged $24 billion from February through August before going negative to the tune of $3.3 billion in September. I would think that Mutikani's readers might be interested in knowing this, especially after much larger than average increases seen in July and August. If wages and salaries stay flat or decline, consumers' ability to spend without borrowing will be seriously constrained, blowing up the entire "the consumer will save us" narrative.
Next time, I would suggest that Mutikani do some genuine digging, or that Reuters find someone else who will.
Cross-posted at BizzyBlog.com.
