February personal consumption expenditures (PCE) increased 0.8% month-to-month in nominal terms and 0.5% in real terms. In real terms, the February PCE increase was the strongest since last September. From some of the naysayers out there (David), we keep hearing that the economic green shoots that have emerged this past winter were due to the unusually mild temperatures. Really? One area of consumer expenditures that has not been boosted by the mild temperatures is electricity and natural gas. In the four months ended January, real PCE for electricity and natural gas contracted at a seasonally-adjusted annualized rate of 36%. (In February, growth in real PCE on electricity and natural gas exploded at a seasonally-adjusted annual rate of 96%!) Now, of course, the "savings" that households experienced on their winter utilities bills could have been spent on more discretionary goods/services, such as ski vacations. Oh, I forgot, there was not a lot of good snow for skiing this winter. Perhaps households could have used these utilities savings for more mundane expenditures such as snow removal services or new snow blowers. Oh, I forgot, there was not a lot of snow this winter. Chart 1 shows month-to-month percentage changes in total real PCE and real PCE excluding electricity and natural gas. Notice that starting in September 2011 through January 2012, growth in real PCE excluding electricity and natural gas exceeded growth in total real PCE. So, evidently, households chose not to spend all of their "savings" on winter utilities bills.
It would appear that households preferred to simply hold on to more "cash" rather than spend their utilities savings on other goods and services. Chart 2 shows the ratio of nominal PCE to the nominal M2 money supply. This is akin to the concept of the velocity of money. A decline in the ratio plotted in Chart 2 means that households prefer to hold more M2 money per dollar of their expenditures on consumer goods and services. The decline in this concept of money velocity started this past summer, becoming more pronounced this past fall through January. In February, this money velocity rose. I think, as the old saying goes, this money "savings" from lower winter utilities bills is starting to "burn a hole" in households pockets.
A Note on the Velocity of Money
In my March 29 commentary, I said that an increase in household saving would not lead to a decrease in aggregate spending unless that increased saving took the form of increased deposits and currency held by households. An increased demand to hold deposits and currency is the same thing as a decrease in the velocity of money, very similar to what I have discussed today in the section above. All else the same, a decrease in the velocity of money will lead to a decrease in total spending in the economy. Why? Wont my increased deposits give my bank more funds with which to lend to other spenders? Yes, my bank will have more deposits. But from where did my banks deposits come? From someone elses deposits. For example, I get paid this week. My deposits rise and my employers deposits fall by a like amount. If I bank at a different institution than my employer, then the bank of my employer loses the funds that my bank receives. If we happen to both bank at the same institution, then our bank neither gains nor loses funds. If I choose to increase my saving by purchasing new bonds, then my spending goes down, but the bond-issuers spending goes up. If, however, I choose to increase my saving by holding more deposits, then my spending goes down and no other entitys spending goes up. The banking system does not gain any additional funds to make new loans by me choosing to hold more deposits.
Paul L. Kasriel
Post-April 30 email: Econtrarian@gmail.com