Stagnant Paychecks Slow Consumer Spending
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You know those colorful Vikings in the Capital One credit card commercials who ask “What’s in your wallet?” Well, maybe they’re asking the wrong question.

Forget QE3, the wealth effect from rising stock prices, and fears of sequestration. The key factor in determining consumer spending, that all-important measure that comprises a whopping 70% of GDP growth, is paycheck size. It’s about how much is in consumers’ wallets. And with paychecks essentially stagnant, it could come as no surprise that economic growth is pathetic, too.

Personal disposable income increased by a mere 2.0% in March, its second smallest monthly gain in more than three years.Increased payroll and income tax rates were part of the problem. Total personal income before taxes increased by 2.5%.

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Unemployment is another issue. The jobless rate – stuck between 7.6% and 7.9% for the past six months –  is putting tremendous downward pressure on salaries and labor rates.

Which explains why Americans have been acting like the world’s largest group of retirees. They’re trying to live on what amounts to a fixed income, reining in both spending and saving, and paying cash whenever possible.

Total consumer spending grew by 3.2% in March, virtually even with gains of the last two months, and well below the 5% monthly increases seen in the first half of 2011.

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Click to see chart full-sized

Much of the increase in spending in the past couple of months has been fueled by a rise in auto purchases. Many Americans have been forced to finally replace aging vehicles, and demand by small businesses has fueled a spike in SUV and small truck sales. The larger vehicle sales have also been helped by a drop in gas prices. Auto sales increased by over 9% in March, the most of any key spending category.

Declining prices for food and energy have allowed folks to cut spending in those areas, freeing up some money to buy new cars. Groceries, which comprises 7% of all consumer expenditures, rose by the smallest amount of any major category – between 1.3% and 1.4% – in each of the past three months.

Two of the biggest nondiscretionary consumer expense categories, housing, at 63% of consumer expenditures, health care, at 16%, have experienced relatively stable spending increases of around 3% each.

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How have discretionary categories fared? With less in their wallets, but able to save on groceries and gas, consumers have been able to take advantage of some of the discounts and other promotional deals waiting for them at the mall, though spending growth in these categories has been pretty lackluster, to say the least.

Spending on apparel and footwear, which comprises just over 3% of total consumer spending, rose by 3.2% on a 12-month smoothed basis in March. Although this was its smallest monthly increase in almost three years, it could have been worse. March brought unseasonably cold weather and slow retail traffic, hurting sales of spring goods. Gains by womenswear outpaced those of other apparel and footwear.

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Spending on jewelry and watches has been rising rapidly, gaining 7% in March, outpacing all other fashion-driven categories. Spending on cosmetics, which was experiencing nice monthly gains this time last year, has slowed somewhat.

Personal savings were $329 billion in March, resulting in a personal savings rate of about 2.7% of disposable income, well below 2012’s average monthly level of over 4%. Although consumers have stopped deleveraging, or paying down credit card debt, they haven’t increased their use of plastic: monthly increases in credit card debt have been running between one-half and one percent for the past several months. However, this lack of ability to save means more people are living paltry paycheck to paltry paycheck, which is not great for future spending and economic growth.

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Although living on what amounts to a fixed income, working Americans aren’t acting like retirees in one respect: they can’t eat at the Early Bird Special, because they’re still at their place of employment, putting in longer hours for less pay.

How much is in your wallet? Really? Okay, then – get out there and shop!

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