U.S. Spending and Production Fall Despite Income Growth

American companies and consumers are spending less even as personal income is growing in a sign that economic growth is under threat.

Several new economic indicators released on Monday indicate that U.S. economic activity is slowing because of disinflation and lowered demand. At the same time, the Bureau of Economic Analysis shows that personal income is rising. Although some economists expected a rise in incomes to coincide with a rise in spending, in reality money velocity and liquidity are in fact falling as more Americans choose to save.

American companies and consumers are spending less even as personal income is growing in a sign that economic growth is under threat.

Several new economic indicators released on Monday indicate that U.S. economic activity is slowing because of disinflation and lowered demand. At the same time, the Bureau of Economic Analysis shows that personal income is rising. Although some economists expected a rise in incomes to coincide with a rise in spending, in reality money velocity and liquidity are in fact falling as more Americans choose to save.

The changing behavior may be a result of greater economic insecurity, as labor market churn has risen and long-term employment has become more unusual.

Personal Spending and Income Trends

Personal incomes rose by a total of $50.8 billion in January, or 0.3% from the prior month, according to the BEA. In their monthly personal income and outlays report, the BEA noted five straight months of income growth and disposable income growth, but expenditures have fallen for two months in a row, in December 2014 and January 2015. The trend of a month-over-month decline in consumption during the holiday season is unusual, and usually only occurs in recessionary circumstances.

Most analysts are dismissing the negative trend, arguing that a fall in oil and gasoline prices is driving the fall in PCE, or personal consumption expenditures. Some suggest that total consumption excluding energy costs is actually higher on a month-over-month basis, although the aggregate fall in spending indicates a lack of confidence in increasing spending or raising credit amongst U.S. consumers. Many economic models indicated that consumers would spend more on other consumables on the fall of oil, bringing total spending up. The reality is that this has not yet occurred in the United States.

Production Signals Slowdown

While consumer spending is down, investors, manufacturers, and builders are also spending less as well, in a sign that businesses are losing confidence in the economy.

According to a report by the Census Bureau, construction spending in January fell 1.1% month-over-month in January. Private residential construction spending is down 3%. Total construction spending is 1.8% above total spent in January 2014, when unusually cold weather caused an economic contraction across the country.

While construction has slowed, manufacturing spending has fallen as well. The Institute for Supply Management’s PMI fell to 52.9 in February, down from 53.5 in January. New orders also fell to 52.5. While this still indicates economic expansion, the numbers are below expectations. The ISM said in a statement that “concern over the West Coast dock slowdown” was driving the fall in the PMI, but a fall in employment, new orders, and total production could have ripple effects that slow the economy more broadly across the country.