US spending up, but income stays flat [HEAT]

The savings rate heads south as Americans spend a larger share of their income.

Consider the latest report from the Bureau of Economic Analysis, which shows that personal consumption grew 0.3% in February while personal income was stagnant. Taking into account the growth seen in January of 0.3% and 0.4% in income and spending, respectively, the first quarter is on track to register a healthy gain of 4.4% annualized in personal spending. In real terms consumption grew 3.4% on an annual basis in the first two months of the year; much better than the scrawny 1.6% seen in 2009Q4.

The worrisome part, however, is that income is only up by an annualized 1.6% in January and February, meaning that Americans are once again tapping into their savings to fund the goods. February’s savings rate is the worst since October 2008.

Digging deeper into the numbers, things do not get better. The component Wage and salary is stagnant while transfer payments increase yet again, this time by 0.8% (after a 1.4% gain in January). It is an untenable situation where transfer payments and a lower savings rate are fueling consumption.

Indeed, personal income less transfer payments adjusted for inflation is one of five criteria by which the National Bureau of Economic Research judges whether or not the US economy is in a recession. This series has climbed a “mighty” 0.35% from the trough in September 2009.