January Personal Income and Outlays

Income and outlay data was mixed to start the year according to the Bureau of Economic Analysis.  Personal income fell $505.5 billion or 3.6 percent in January.  The drop in income did not stand between American consumers and their spending habits.  Outlays managed to increase 0.2 percent or $18.2 billion.

Incomes were helped in December by accelerated bonuses.  Employers did employees a favor, anticipating changes to individual tax rates to start the year, so the decline in income for the first month of the year was not a surprise.  January’s survey is the first since the full reinstatement of the Social Security withholding.  This negatively impacted real disposable income (which is a measure of inflation adjusted after-tax pay), since a larger percentage of income was taken from Americans to fund the safety net.

Despite the change in income, spending increased for the month. When adjusted for inflation, the increase in outlays was 0.1 percent.  This is the same pace of growth as in December, but the composition of spending was different.  Consumers were less willing to part with cash for durable goods.  Consumption of goods expected to last at least three years fell 0.8 percent compared to a 1.3 percent jump to end 2012.  Non-durable spending increased 0.3 percent versus 0.1 in the prior period.  Americans also increased the consumption of services after this category was slightly negative in December.

The combination of increased spending with decreasing income puts pressure on the nation’s savings rate.  The rate collapsed from 6.4 percent in December to 2.4 percent in January.   This measure of consumer health is suggesting tremendous strain on the household income statement and will be monitored in the months ahead.

Finally, the Federal Reserve’s favorite measure of inflation is included in the report.  The core (excluding food and energy) measure of the personal consumption expenditure price index remained rather stable at up 0.1 percent for the month.  The year-over-year measure of this inflation gauge has been trending lower since finding a recent peak of 2.0 percent in March of 2012 and is now just 1.3 percent higher than a year ago.

With inflation as low as it is, America’s central bank  has room to be additionally accommodative as it attempts to engineer a faster pace of economic growth.   This space may be necessary if real disposable income does not improve in the months ahead.  With a saving rate of 2.4 percent, the country is already spending most of what it takes home, so an improvement in income is needed or consumption may wane.  If the recent improvement in America’s employment continues, the country may already be experiencing this needed income surge.    (by C. Cox)