Nominal personal income came in at 0.3%, which was lower than the expected rate (0.4%) and is now 3.5% higher than a year ago. Real personal disposable income also experienced a solid increase, rising 0.3%, but annual growth is a little slower at 2.1%. Consumer spending was somewhat stronger, rising 0.5%, following 0.2% and 0.4% readings in nominal dollars in November and October, respectively; this matched the forecast increase. Real personal spending was 0.3% higher. Spending in the month (in real terms) was driven by increases in durable goods expenditure (1.4%, largely autos) and spending on services (0.3%). Spending on nondurable goods, was unchanged.
Private sector wages and salaries (roughly 45% of personal income) were up 0.4% in the month (current dollars), following a 0.1% decline in November. Meanwhile, government sector wages and salaries were 0.2% higher; they are now 2.8% higher annually. This annual rate of change is improving, but still far below the historical median rate of 6.4% (1960-2016). Private sector wages and salaries increased 3.7% over last year (historical median was also 1960-2016 = 6.4%). Lastly, the PCE price index and the core price index were up by 0.2% and 0.1%, respectively. The annual change for the core rate was 1.7% and 1.6% for the headline rate (still well below the Fed’s target).
The U.S. consumer continues to be in relatively good shape with incomes rising and the 4.7% unemployment rate suggesting workers should be starting to press for higher wages and salaries. However, consumers are also being faced with a number of headwinds, this includes a 10% annual increase in energy prices, following two years of falling prices; rising interest rates, which we are already seeing reflected in consumers’ behaviour in the mortgage markets; and rising inflation, which will start to damage real disposable personal income growth unless wages and salaries start to improve or tax cuts take effect; this includes the potential impact on medical care prices, which could move significantly higher in the Fed’s favourite PCE deflator, having been held back in recent years by the Affordable Care Act. Real disposable income is growing, but the pace has been decelerating. Lastly, it is also the case that transfer receipts now account for a large 16% of total personal income, if President Trump opts to cut these payments, this would act as a drag on both income and spending. With the Fed planning on tightening rates three times this year, it will have to pay very close attention to the response from the consumer. Whilst they are in relatively good shape at the moment and solid growth is likely to continue, there are greater headwinds than was the case in the last couple of years.
For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.
Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.