Nominal personal income came in at 0.4%, which was above the expected rate (0.3%) and is now 4.0% higher than a year ago. Real personal disposable income was less positive, declining by 0.2%, with the annual growth rate slipping to 2.0%. Consumer spending rose by just 0.2%, following 0.5% and 0.2% readings in nominal dollars in December and November, respectively; this was lower than the forecast increase. Real personal spending was 0.3% lower. Spending in the month (in real terms) was driven by decreases in durable goods expenditure (0.8%, largely autos) and spending on services (0.2%). Spending on non-durable goods, was unchanged.
Private sector wages and salaries (roughly 45% of personal income) were up again by 0.4% in the month (current dollars). Meanwhile, government sector wages and salaries were 0.5% higher; they are now 3.0% higher annually. This annual rate of change is still far below the historical median rate of 6.4% (1960-2016). Private sector wages and salaries increased 4.8% over the last year (historical median was also 1960-2016 = 6.4%). Lastly, the PCE price index and the core price index were up by 0.4% and 0.3%, respectively. The annual change was 1.7% for the core rate and 1.9% for the headline rate (still below the Fed’s target).
The U.S. consumer continues to be in relatively good shape with stronger balance sheets, rising incomes, and a 4.8% unemployment rate, suggesting they should soon start to gain a little more pricing power to allow for higher wages and salaries. Furthermore, if the President is able to delivery on his tax cuts for individual income tax, these should also help to support near-term consumption. Nevertheless, consumers are faced with a number of headwinds, which for the most part were not in place last year; these include 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 (in part related to oil prices), which is starting to damage real disposable personal income growth, as seen in today’s report. Also, as we pointed out in yesterday’s note on consumer confidence, while there has been a sharp improvement in consumer sentiment, this is not being driven by all segments of the population, rather it is almost exclusively due to the 55-year-olds and older; sentiment for those 35 and under has dropped since the election. This is likely to have significant distributional impacts on household consumption in the coming years. Finally, with the Fed planning to tighten rates three times this year—which seems even more probable after yesterday’s speech from NY Fed President Dudley and which we view as a realistic goal—this report will help to further support its case.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.