(By Mani) Holiday season began with decent sales on Black Friday and strong a Cyber Monday, which, according to comScore, became the heaviest online spending day on record at $1.46 billion. However, predicting the actual state of personal income and spending has been difficult.
Personal consumption expenditures were very weak out of the gates in October, decreasing by 0.2 percent in nominal terms while dropping by 0.3 percent after adjusting for inflation. This was the first drop in personal consumption expenditures since May when we also saw a 0.2 percent decline.
However, the BEA indicated that the October results, both for income and spending, were affected by Hurricane Sandy, which hit the northeast on Oct. 29. According to the BEA, it is difficult to quantify the effects of the hurricane on these variables, but that the largest adjustments were made to wages and salaries due to work interruptions.
[Related -The S&P 500’s Worrisome Downturn In Drawdown]
"While the BEA is correct in pointing out the effects on wages and salaries, it is also true that personal consumption expenditures typically surge during the days prior to a hurricane, which would tend to indicate that the weakness in spending would have actually been stronger than the reported drop of 0.2 percent during the month," Wells Fargo economist Eugenio Alemán wrote in a note to clients.
October's results may not be a good indicator for gauging what may happen during the fourth quarter of the year as the northeast region is not accustomed to hurricanes so consumers may not have been prone to hoard goods in the days prior to the hurricane.
[Related -Deflation Warning: The Next Wave]
As the BEA indicates, the flatness in personal income during the month of October may be related to the effects that Hurricane Sandy had over wages and salaries. According to the BEA, the adjustment to wages and salaries was in the vicinity of $18 billion at an annual rate. Thus, private wage and salary disbursements decreased $17.1 billion in October after increasing $22.4 billion in September.
Furthermore, personal current transfer receipts decreased $6.7 billion during the month compared to an increase of $13.6 billion in September.
"It is important to note that we will probably see a reversal of the decreases in wages and salaries in November's personal income release as firms and workers recover these wages from work stoppage insurance payments as well as from all of the extra hours worked by public utility, clean up and security workers in the aftermath of the hurricane," Alemán noted.
Thus, expect a partial reversal in many of the November numbers, something that will make an analysis of the true state of personal income and spending during the last quarter of the year even more difficult.
"We also expect the effects of the fiscal cliff to start showing up in November and December. This means that the true state of economic activity for the last quarter of the year will remain highly uncertain, to say the least," Alemán added.