Friday, January 31, 2014

Monthly Income and Spending Report

Yesterday's GDP report received a lot of attention, but today's report on personal income and spending for December is likely to receive little attention.  The information from the report was already incorporated into the GDP report, so in some ways it is old news (24 hours old).  However, there are additional details that provide insight into the state of the economy.  The headline numbers show that consumer spending (adjusted for inflation rose briskly in the fourth quarter, though at a more modest pace in December, as the quarter ended.  Meanwhile, income adjusted for inflation was pretty flat in the quarter, declining slightly in December.  If income is flat and spending increases, that means the savings rate fell.  It now stands at 3.9%, which is the lowest since 2008 (other than January 2013, which was distorted by income adjustments in anticipation of the tax hikes in 2013).  Optimists will say that consumers are gaining confidence and don't think they need to save as much while pessimists will claim that the recent increase in consumer spending is not being supported by gains in income.  My take is somewhat in between.  The overall pace of consumer spending is likely to increase somewhat compared to recent years, but not back to the rate of the good old days.  For many households, access to credit is limited and future increases in spending are likely to be constrained by increases in income, which are likely to remain modest (though somewhat higher than in recent years).

On an unrelated note, one of the biggest concerns facing financial markets in recent weeks is the state of emerging markets.  I may post some comments soon about it, but in the mean time I'll refer you to comments from economists from Wells Fargo, which I think are pretty much on target.