Are consumers becoming reckless again? Yes and no. The good news is that it doesn't appear as if people are loading up debt to fuel purchases.
"This is not a credit binge. Bank loans continue to contract," said Keith Hembre, chief economist with First American Funds in Minneapolis.
Instead, it looks as if the increase in spending was a direct result of people dipping into their savings. That's the bad news. The savings rate has inched up dramatically from virtually zero before the recession to as high as more than 6% last spring.
Most economists believe that consumers need to do a better job of saving in order to avoid another economic disaster like the one we've lived through since the end of 2007.
However, there may be reason to take a tiny bit of solace from the decline in the savings rate in January. At least consumers felt comfortable enough to spend despite the tepid increase in income.
That's important because it is actual spending -- not the nebulous, touchy-feely consumer confidence numbers that get so much hype -- that is the most important barometer of consumer sentiment about the economy. So the January increase in spending is a small step in the right direction.
This also helps explain some of the confusing and occasionally conflicting reports about consumer confidence over the past few weeks.
Despite the talk about people growing increasingly jittery about the economy, several consumer companies -- ranging from retailers J.C. Penney (JCP, Fortune 500) and Home Depot (HD, Fortune 500) to shoe makers Deckers Outdoor (DECK) and Steven Madden (SHOO) -- have given healthy outlooks for the remainder of the year in the past few weeks.
0:00/4:43We can't go back to the old economy"There is a lot of pent-up demand for goods but no income growth yet," said Diane Swonk, chief economist with Mesirow Financial, a diversified financial services firm based in Chicago. "At the end of the day, the only way for consumers to spend more is to tap into savings a bit. That shows a little more confidence, but little is the operating word."
Swonk believes that the savings rate will continue to fall this year as consumers spend more, but that this is a necessary evil to get the economy back on track. She also said that, over time, the savings rate will probably climb again as the U.S. economy becomes more dependent on exports.
"For the longer term, we want a higher savings rate, but without spending now there is no recovery," she said. "Its important for consumer demand to help create jobs. That's the only way to get into a self-sustaining recovery."
Zach Pandl, an economist with Nomura Securities in New York, agreed that a more robust job market is the key to the economy getting back on solid footing. And he said there were some encouraging signs of this in the January spending and income report.
He said that if you look past the headline income growth number, which includes things such as tax refunds, Social Security payments, and investment income in addition to wages, salaries actually rose at an impressive rate in January.
Wages and salaries were up 0.4% in January from December. That's the fourth straight monthly increase. And if people with jobs are earning more, they might be more inclined to spend. That could help create the self-sustaining recovery Swonk spoke about.
"There has been a very impressive rebound in consumer spending. If wage growth continues to pick up, consumer spending will hold up," Pandl said.
That's probably true. But the problem is that even if wage growth continues, the decline in other sources of income is not something that should be easily dismissed.
Hembre said he expects a reduction in so-called transfer payments, i.e. unemployment benefits, Medicaid, earned income credits and other government payments to consumers, this year compared to 2009.
That, combined with the price of oil and gas rising sharply from last year's levels, should lead to little growth in disposable income -- even if salaries increase.
So with banks still reluctant to extend new lines of credit and income growth stagnant at best, people are either going to be forced to drain their savings further or just start spending less.
Spending less is the financially responsible thing to do, and it would have the most benefits for the long term. But if people do really resort back to saving more and consuming less, we can probably kiss chances of a robust recovery in the next few months goodbye.
- - The opinions expressed in this commentary are solely those of Paul R. La Monica.
Year-end economic spurt shows signs of sputteringGDP
