Ross C. DeVol
Chief Research Officer
Bioscience and Business and California and Energy and Global Economy and Health and Human Capital and Innovation and Labor and Medical Research and Regional Economics and Technology and U.S. Economy
Ross DeVol is the Chief Research Officer at the Milken Institute. He oversees research on international, national and comparative regional growth performance; access to capital and its role in economic growth and job creation; and health-related topics.
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The silver lining in an otherwise dreary week of economic reports
By: Ross C. DeVol
June 01, 2012
Economic data from the around the world were decisively negative the week of May 27 to June 2: banking insolvency threats in Spain, The Conference BoardaEUR(TM)s measure of U.S. consumer confidence falling in May, Euro-zone business and consumer sentiment dipping again in May, ChinaaEUR(TM)s official PMI for May slipping to just above the break-even 50 level and FridayaEUR(TM)s U.S. job report showing a net addition of just 69,000 in May.

However, at the risk of sounding Pollyannaish, I have found the silver liningaEUR"AprilaEUR(TM)s U.S. report on personal income and outlays. Because of all the market attention to the disappointing jobaEUR(TM)s report, the good news in the consumption spending numbers was completely overlooked by investors.

First, there is no way to sugarcoat the jobs report for May; it was bad. The establishment survey showed a net job gain roughly 80,000 below market expectations, with modest downward revisions in March and April taking out 44,000 jobs that we thought had been created. The biggest disappointment was that professional and business services were basically unchanged in May after averaging gains of 43,000 a month the past year.

But here, too, there was a silver lining in the gloom of those numbers: the companion household survey showed that 422,000 jobs were created. The household series is from a smaller sample and can be very erratic from month-to-month, but it offers the possibility of upward revisions to the establishment survey in subsequent months. Some of the falloff in growth was a payback from the mild weather-inflated figures from the winter. Further, the household survey recorded a 700,000 greater net job addition over the past 12 months than in the establishment survey. (Well, OK, I did sugarcoat the jobs report a little bit.)

It was a rare occurrence for the employment and personal income and outlays reports to be released on the same day. Normally, the personal income and outlays report is released before the jobs report. Because the jobs report is a vital piece of economic information, it is covered heavily in the economic and financial media. Additionally, the jobs report was released earlier on Friday, which meant the consumption spending numbers were ignored.

Back to the good news: What the consumption spending numbers for April show is surprising strength when viewed on a real or inflation-adjusted basis. Nominal consumer spending rose 0.3 percent in April. But because of declining oil and gasoline prices, there was no change in consumer prices. This resulted in a 0.3 percent increase in real consumption expenditures in April.


As the accompanying chart demonstrates, real consumer spending has been on a decidedly upward trajectory since late 2011. Much of this strength has been driven by recovering auto purchases. After bottoming out around 9.5 million units per year in late 2009, light-vehicle sales have averaged above 14 million units on an annual basis the first five months of 2012 aEUR" the result of substantial pent-up demand as people held off buying vehicles during the Great Recession. A measure of that demand is the average age of the countryaEUR(TM)s vehicles: 10.3 years, a record high. The same situation is applicable to appliances, furniture and electronic gadgets.

If you assume a 0.2 percent increase in real consumption spending for May and June (a conservative estimate), it implies an annual rate of increase of 3.2 percent for real consumption spending in the second quarter. The first quarter GDP report contained a 2.9 percent annualized increase in real consumer spending. Even if you assume a 0.1 percent increase in consumption spending for May and June, it results in a 2.5 percent annualized rise for the second quarter. This is great news for the second quarter GDP number.

WhataEUR(TM)s the moral of this story? Bad news typically feeds on itself and can become a self-fulfilling prophecy. LetaEUR(TM)s not talk ourselves into further weakness. A balanced approach is always better. Besides, maybe we will get more favorable news from factory orders and the ISM due out on June 4 and 5.