December Personal Income

Personal income was flat during the final month of 2013 according to the Bureau of Economic Analysis. The stagnation followed an uptick of 0.2 percent in November. Spending rose by 0.4 percent despite income not growing. Also included in the BEA’s release in an important measure of inflation, and it was slightly higher as the year came to a close.

The various types of income were mixed in the period. Wages and salaries, the largest component of the indicator, ticked up by just $0.7 billion compared to November’s improvement of $35 billion. Wages within the goods producing industries and government wages were higher. Service producing industries’ payrolls fell $3.6 billion. Farmers experienced a second consecutive monthly decline of $14.3 billion. Rental income improved in the period. Disposable income (after-tax pay) declined in the period. This matters because this is what makes its way into the economy. When disposable income falls but spending increases, as it did to end 2013, the saving rate falls; the rate was 3.9 percent in the period versus 4.3 percent in November. Periods of lower savings tend to have a limited duration. If consumers’ incomes do not increase, Americans are likely to revert back to a higher savings rate which means less spending.

Inflation remains tame. The Personal Consumption Expenditure (PCE) price index ticked up 0.2 percent. This is higher than the uptick of less than 0.1 percent in November. To get the Federal Reserve’s favorite inflation measure, food and energy are removed. This leaves the core PCE price index, and it was up just 0.1 percent, the same increase as November. On an annualized basis, the fourth quarter’s inflation rate was just 1.1 percent. Considering all of the stimulating the central bank has done, this is still quite low. With a new person at the helm of the Federal Open Market Committee, it will be interesting to see how the group reacts since the employment situation has been improving but price increases have been below the growth rate typically understood to be acceptable by that organization. (by C. Cox)