U.S. Personal Income vs. Spending: Unsustainable Gap?

To the bulls, news that personal spending was up 4% in December on a year-over-year basis, even though personal income only just managed to eke into the black (+0.5% for 2009), indicates the consumer is still alive and kicking.

In fact, it wouldn’t be surprising if some analysts noted the similarity between the current trend of those two data series and what we witnessed almost three decades ago, when a dramatic burst of consumption kicked off the economic boom of the 1980s and 1990s.

Unfortunately, this theory has a few holes in it. For one thing, Americans have far less pent-up demand in the form of savings than they did back then, when personal savings rates as a percentage of disposable income were considerably higher than they are now. They are also much more indebted than they were back then.

In addition, a much greater share of their income these days is derived from government largesse, as I noted in a recent post at Financial Armageddon, “A Growing Share of Americans’ Income Comes from the Government.” For all their failings, it does appear that government stimulus efforts have put some money in people’s pockets.

Either way, given what we do know about the health of the consumer, it seems a good bet that spending won’t hang in there for too long without a genuine pick-up in economic activity.

So far, there’s little evidence that’s the case.

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