The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
Today's personal income report may not get much attention for a lot of reasons. If a piece of government data falls in a forest and nobody's around because they're bracing for Hurricane Sandy, does it make a sound?
But investors and consumers should not completely ignore the latest figures for September on consumer spending and saving. Personal expenditures rose 0.8% last month, well ahead of the 0.4% increase in personal income. As a result, the savings rate fell to 3.3% from 3.7% in August. This is the third consecutive month of declines in the savings rate. As recently as June, the savings rate was 4.4%.
That is not a good sign. It seems to indicate that consumers are tapping into savings more in order to spend. That could provide a short-lived boost to the economy. But at what cost?
Even though the economy has been puttering along at a slug's pace for a few years now, one positive for the long-term health of the nation is that consumers have been cutting back on debt. Or so we thought. If the era of thrift and frugality is already over and consumers are now depleting their savings accounts in order to spend again, we risk getting in a similar type of credit-induced mess as we did leading up to the Great Recession.
Paul Dales of Capital Economics wrote Monday morning that "September's US personal income and spending data confirm that households were only able to boost consumption in the third quarter by dipping into their savings." But Dales sees a bright spot ahead, if you want to call it that. He predicts that "faced with the prospect of major tax hikes in the New Year ... [consumers] will soon become more cautious.
In other words, the looming fiscal cliff will force Americans to start saving more again. But when will that happen? In January?
Many retailers are staffing up for the holidays in anticipation of strong fourth-quarter sales. And consumers may deplete their savings for the next three months before reality sets in. At that point, they'll be faced with the bills from their shopping sprees.
With the job market still relatively weak, it's hard to imagine that incomes are going to rise sharply. As long as people are spending more than they take in, that could be a recipe for disaster.
Jim O'Sullivan, chief U.S. economist with High Frequency Economics, pointed out in a report Monday that real disposable income was up a mere 0.8% for all of the third quarter.
"While real spending finished Q3 strongly, still-weaker income data will keep alive doubts about sustainability," he wrote.
Consumers on the East Coast may also be spending aggressively this week on necessities due to Hurricane Sandy. It will be interesting to see if Wal-Mart (WMT), Target (TGT) and Costco (COST), as well as supermarket chains Kroger (KR) and Safeway (SWY), will report big sales for October thanks to a panic-induced rush this weekend on milk, bottled water and batteries.
For consumers who are being forced to buy more groceries now, it seems that unless they want to tell their kids that Sandy is the Grinch that Stole Christmas, they're likely going to have to tap into savings even further and bust out those credit cards to keep spending.
So let's hope that history doesn't repeat itself and consumers do start saving more again in 2013.
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