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.

Personal Income and Spending for November

The government released its estimate of personal income and spending for November and it contained some pretty good news (good is relative nowadays!).  Real disposable income rose by 0.8% while real consumer spending rose by 0.6% (reflecting an inflation rate of -0.2% for the month due to declining energy prices).  The report confirms that Hurricane Sandy contributed to the weakness in October, so the November figures reflect a bounceback from a temporarily depressed level.  If one takes a 3-month average, real disposable income is growing at an annualized rate slightly in excess of 3% (mainly driven by November's surge) while real consumer spending is growing in excess of 3.5% (annualized).  The personal savings rate rose to 3.6% (from 3.4%).  On the inflation, both core and overall inflation are approximately 1.5% (overall inflation is 1.4% over the past year; core inflation is 1.5%).

The surprise from the report was the surge in real disposable income.  Though some of it reflects a bounceback from Sandy, real disposable income has increased by 2.5% in the last 12 months, the highest year-over-year change since March 2011.  If this is sustained, consumers may be better able to handle tax hikes than previously thought.  It gets a little complex, but it's doubtful whether this pace will be sustained since it reflects depressed income in November 2011 and a surge in November 2012.  Of course the big issue is how the resolution to the fiscal cliff will affect disposable personal income.  Given the likelihood of the end of the payroll tax cut and higher taxes on upper-income individuals, real disposable income will take a significant hit in early 2013.  The size of the impact on consumer spending will determine how weak the economy will be in the first half of next year.