The savings news was good from the perspective of household balance sheets, but it’s kind of lousy for economic growth. Personal spending was unchanged in May, rather than the 0.1% expected increase, which marked the weakest monthly performance in a year. Including inflation, personal spending sank 0.1%, which was the second monthly decline in a row. That basically rules out any support from the consumer in the second quarter.
Panning out to the bigger picture, this probably means annualized real consumption probably grew by less than 1% in the second quarter as a whole — compared with 2.2% in the first, which is really pretty bad.
Real consumption growth was expected to come in around 1.5%, so the risks to second-quarter gross domestic product growth forecasts of 2% are now on the downside. Yikes.
However, here’s a good excuse from bulls: Some of the decline in real spending in May was probably temporary. The 0.8% month-over-month decline in goods spending was led by a sharp fall in vehicle sales. Some of that decline should be reversed in the third quarter, Capital Economics analysts argue, as the Japan-related supply shortages fade.
And, here’s another excuse. The 0.2% month-over-month increase in services spending would have been larger if it wasn’t for the unseasonably cool weather.
I don’t normally put much stock in the weather excuses. There’s bad weather every quarter it seems, at least in some region. One real reason that consumers have held onto their wallets: Nominal incomes rose by just 0.3% in May and real incomes were up by 0.1%, according to the latest data.
Real incomes (i.e. inflation-adjusted) have been almost unchanged for the last four months. Simply put, the consumer recovery lost momentum in the second quarter.
With any luck, some of that will be reversed in the third quarter as the latest decline in gasoline prices provides a boost to households’ spending power. But that won’t be enough to usher in the good times that will make retailers like Urban Outfitters (NASDAQ:URBN) and eBay (NASDAQ:EBAY) come back to life.
I met a veteran eBay retailer at a party over the weekend who told me that sales have absolutely nose-dived in a way she has never seen before — even worse than 2008 and the first half of 2009. She sells vintage dresses that used to fetch $125-$185, and now rarely fetch more than $50 to $65 — and inventory is piling up. She said if sales did not improve she would have to look for another job for the first time in six years.
That’s front-line retail for you, and more than likely a microcosm of the sector overall at a time when consumers are pulling back from purely discretionary purchases.