Consumer Spending Rises, But That's Not Necessarily Good

The Commerce Department report showing consumer spending was up a sharp 0.7 percent in February was greeted as good news on Wall Street this morning, an encouraging sign that the economy continues to improve.

But just how encouraging is it for consumers?

In fact, the rise was not because consumers went out and bought big screen TVs and new cars and took winter vacations, though there was some of that. Rather, the increase is mostly due to the fact that consumers had to spend more for certain items, especially food and gasoline.

Involuntary spending

When consumers spend an extra $10 every time they fill up their cars with the same amount of gas, or spend an extra $12 every time they visit the grocery store, it counts as increased consumer spending. But it’s hardly voluntary, discretionary spending – the kind that can really kick start an economy.

“While the consumption numbers look real strong, a lot of the money coming out of households’ pockets went to pay for rising prices,” said economist Joel Naroff, of Naroff Economic Advisors in Holland, Pa.  “The Fed’s key inflation indicator jumped and even excluding food and energy it was up at a pace that if continued, would not make the FOMC (Fed Open Market Committee) members happy.”  

Adjusting for inflation, Naroff says spending was only “decent,” not spectacular. 

Disappointing income

Disposable personal income, which adjusts for taxes, rose at a somewhat disappointing pace.  Wages and salaries increases were limited and, while that may help corporate earnings, Naroff says it doesn’t do much for spending power. 

“What is of real concern is that incomes rose less than prices,” Naroff said. “Thus, household spending power actually declined.  That does not bode well for economic growth if it keeps up.”

The bottom line? While consumers spent more money last month, they may not have done so cheerfully.