Consumers Spend More Even Though Personal Income Declines

That Cannot Happen Much Longer; Ominous Signs for the Economy

If consumers want to increase spending, but their income is not going up then their choices are to borrow more money, or to liquidate savings to finance the higher consumption.  This is what consumers did in August 2011.  The Commerce Department reported on consumer income and spending last week and the numbers were not good.  On the income side this is what happened.

Is This What They Mean When They Say
The Economy is Flatlining - Hopefully
Not Flatllining

Personal income edged down 0.1% in August from July, the Commerce Department said Friday. Disposable income, which strips out tax payments, fell 0.3% when adjusted for inflation. Wages also fell as businesses laid off employees and cut back workers' hours.

On the spending side this is what happened.

Even as their incomes declined, workers spent more—but not by choice. Spending rose 0.2% from July, but the entire increase was explained by higher costs, mostly of food and energy.

So how did they manage to increase spending more than the increase in income?

With nowhere else to turn, households tapped deeper into savings. Americans saved 4.5% of their income in August, down from 4.7% in July and 5.6% a year earlier, when the recovery appeared stronger and households were trying to pay off debts incurred during the boom years.

And the conclusion of at least one economic consulting firm.

Amid the grim indicators, the Economic Cycle Research Institute, a forecasting firm, said that based on its analysis of dozens of indexes, the U.S. economy is falling into another recession. "And there's nothing that policymakers can do to head it off," the institute said on its website.

Now The Dismal Political Economist is not familiar with the Economic Cycle Research Institute, and just because they say there will be another recession doesn’t make it so. The U. S. is definitely in a period of what he has named "The Great Stall". 

 But the fact that talk is now about “another recession” rather than “growth resuming” is not good.