Some require destruction due to high prices, especially of gasoline. The shortage of new vehicles is not encouraging spending on durable goods.
By Wolf Richter for WOLF STREET.
Consumers have shifted their spending from goods to services since last year, following the stimulus-fueled goods spending binge in the summer of 2021 and the collapse in spending on discretionary services during the pandemic. Given the extent of inflation these days, we will discuss here all measures of income and expenditure in inflation-adjusted (or “real”) terms.
Spending on services rose in May, but spending on goods fell – all adjusted for inflation. Lower spending on goods is partly explained by lower spending on inflation-adjusted gasoline, where soaring prices are now destroying some of the demand, measured in barrels per day. This economic phenomenon of “demand destruction” by soaring prices is also visible in used vehicles and certain other goods. Spending on durable goods continues to be hampered by the persistent shortage of new vehicles.
And overall spending, adjusted for inflation, fell 0.4% in May from April, the first month-over-month decline in five months, according to the Bureau of Economic Analysis today. today, but rose 2.1% from the stimulus-fueled frenzy a year ago. , and increased by 5.2% compared to May 2019. It remains below the pre-pandemic trend (green line):
Expenses are for services.
“Real” expenditure on services – health care, housing, education, airfare, hotels, rental cars, entertainment and sporting events, haircuts, all types of repairs, subscriptions to communication services, internet and streaming, etc. – rose 0.3% in May compared to April, and 4.7% year-on-year, and 1.2% from May 2019, after first exceeding the pre-pandemic summit. But it remains well below the pre-pandemic trend (green line in the chart below).
As consumer spending patterns continued to normalize, the share of spending on services rose to 61.9% of total spending, the highest since before the pandemic, and up from the 59% range during from the stimulus-fueled property spending spree last spring. But consumers still have a ways to go: the share of spending on services remains below the 64% range that prevailed in normal times.
In terms of inflation, this shift in demand from goods to services is also evident in the CPIs for durable goods, where some of the scorching heat is easing, and in the CPI for services, which has started to rise. sharply :
“Real spending on non-durable goods, after a stimulus frenzy, has fallen, still at high levels.
Inflation-adjusted spending on non-durable goods – food, fuel, household supplies, etc. – fell 0.6% in May compared to April, and fell 1.0% from the miracle-stimulus peak of May 2021. They were still up 10.8% from May 2019 , and returns to the pre-pandemic trend (green line)
“Real” spending on durable goods is falling, still at high levels.
Inflation-adjusted spending on durable goods was down 3.5% in May from April and down 5.6% from the May 2021 stimulus miracle, but still rose 21%, 1% from May 2019 and remain above the pre-pandemic trend.
New and used vehicles are the main component of spending on durable goods. Spending on new vehicles is constrained by new vehicle shortages – consumers can’t buy what dealerships don’t have – and new vehicle inventories remain desperately low, and sales are down due to these shortages .
“Real” income below pre-pandemic trend.
Personal income from all sources and inflation-adjusted fell 0.1% in May from April, and fell 1.0% from a year ago, when stimulus money was still pouring into the coffers consumers. This includes income from wages and salaries, dividends, interest, rentals, farms, businesses, and government transfer payments (stimulus, social security, unemployment, welfare, etc.), but does not include not capital gains. This real income from all sources is up 6.0% compared to May 2019 (purple line).
Personal income without transfer payments and adjusted for inflation edged up 0.1% in May from April, and 1.8% from a year ago, and rose 4.7% from May 2019. It has remained stubbornly below the pre-pandemic trend as income increases have not kept pace with inflation (red line).
Disposable income per capita, adjusted for inflation… you guessed it.
The income trends described above describe the dynamics of the overall economy by all consumers combined – they are designed to be a measure of overall income, not the average consumer’s income. The difference between the two is population growth, which divides the income pie into several slices.
Then there is an additional element: taxes. Once consumers have finished paying taxes on their income, only “disposable income” remains.
These common economic terms are a hoot when you think about it for too long by accident: the sole purpose of the consumer in the world is to “consume”, which means to spend their income, first on taxes, then “dispose” of the rest in paying for other goods and services.
This disposable income per capita – after-tax income per person from all sources – adjusted for inflation, fell 0.1% in May compared to April and fell 3.6% compared to a year ago. , but still increased by 1.8% compared to May 2019.
After falling sharply since the miracle stimulus period, “real” disposable income per capita remained virtually unchanged for four months. It fell below the pre-pandemic trend in September last year, as inflation began to outpace incomes, and has since fallen even lower than pre-pandemic trends:
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