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Consumers Disregard Mayans And Fiscal Cliff

 December 24, 2012 09:51 AM

(By Mani) For the whole of 2012, U.S. households have been relying on income as well as lower savings in order to afford higher consumption during the year after propping up savings considerably since the start of the Great Recession.

The reason for this is that real disposable income has been relatively weak during the recovery from the Great Recession, which means individuals have had to use all the help they could get to keep consuming at current rates.

However, personal consumption expenditures increased by 0.4 percent in November while real personal consumption expenditures increased by more, 0.6 percent. Lower inflation allowed individuals to benefit from an increase in purchasing power.

It is clear that the potential effects of the fiscal cliff have not derailed individuals from consuming. We still have one more month to go in 2012, so December could be the month when everybody realizes that personal income is likely to decline starting January 1, 2013," Wells Fargo economist Eugenio Alemán said in a client note.

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Even if the majority of the fiscal cliff is avoided, payroll taxes will increase next year, which will be enough to keep consumer spending on the edge in 2013.

The increase in personal consumption expenditures seems to confirm other reports about a strong start to the holiday season during Black Friday. However, one should take this report with caution as it is still difficult to know the full effects of Hurricane Sandy in the Northeast from the point of view of individual's consumption patterns.

"Personal consumption expenditures are not booming, as they should be, if we give credence to all the talk regarding the "end of the world," either according to the Mayas or to the modern version of it, our own fiscal cliff," Alemán wrote.

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Consumers should have been adjusting their spending one way or another in preparation for these events. Personal consumption was strong in November; over the year it has been supported by a combination of higher personal income and a lower savings rate.

The strong performance of personal income in November, an increase of 0.6 percent versus a meager 0.1 percent increase in October needs to be taken with caution as the effects of Hurricane Sandy had a strong presence on those results.

Falling gasoline prices, on the other hand, also helped individuals in November, as real disposable personal income increased by 0.8 percent versus a nominal increase of 0.6 percent. The difference between nominal personal income, at 0.6 percent, and nominal personal consumption expenditures at 0.4 percent pushed the saving rate higher in November, to 3.6 percent from 3.4 percent in October.

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