Nominal personal income came in at 0.5% relative to the 0.4% expected rate, and is now 4.3% higher than a year ago. Meanwhile, real personal disposable income increased by 0.4% in the month, following a similar rise in December; it was up 2.8% annually. Consumer spending was 0.5% higher, following a 0.1% rise in nominal dollars; this was just above the 0.3% forecast increase. Real personal spending was 0.4% higher. Spending in the month (in real terms) was driven largely by a rise in durable goods expenditure (1.1%), whereas spending on nondurables rose by 0.4% and spending on services by 0.3%.
Private sector wages and salaries (roughly 45% of personal income) were up 0.7% in the month (current dollars), following a 0.2% increase in December. Meanwhile, government sector wages and salaries were 0.4% higher; they are now 2.6% higher annually. This annual rate of change is improving, but still far below the historical median rate of 6.4% (1960-2014). Private sector wages and salaries increased 4.9% over the last year. Lastly, the PCE core price index was 0.3% higher, with the headline rate 0.1% higher. The annual change for the core rate was 1.7% and 1.3% for the headline rate.
While today’s GDP report was positive it was the second revision to fourth-quarter data and by now even more backward looking, whereas today’s report for personal income and spending gives us a better early look into how first-quarter consumption data is holding up. The picture shows us that consumers are clearly spending (and it is starting to broadening out a little past automobiles) in line with or even slightly behind income growth. The trend in the savings rate, however, remains upward. Consumers are saving more, taking out less debt, and still seemingly in balance sheet repair mode despite the strong employment situation. This report also gives us an update on the Fed’s favourite measure of inflation, the PCE price index, which it uses for its 2% target. As we discuss in this week’s Economics Weekly, while there has been a recent whiff of inflation, driven by a flattening out of commodity prices, some increases in medical care costs and rental prices, we are not yet seeing much in the way of wage inflation or strong enough demand to dramatically offset the excess global supply situation. As far as the Fed is concerned, this will be a very positive report, but also evidence that with inflation still relatively moderate, there would not seem to be any urgent need to push rates higher to quell a nascent breakout of inflation.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.