A new report from the U.S. Department of Commerce showed that personal income for Americans rose by 0.4 percent in December, an improvement from November and slightly better than anticipated. During this same period consumer spending, which accounts for more than two-thirds of the economy (GDP), also lifted by 0.4 percent. That was slightly worse than expected but the November gain was revised much higher. More importantly, rising incomes are supportive of consumer spending, and real (inflation-adjusted) personal income increased by 2.4 percent in 2017, the fastest pace of annual growth in two years.
However, the rise in wages is still weak compared to past economic cycles, and many Americans continue to dip into their savings to support their consumption needs. In fact, personal saving as a percentage of disposable personal income fell in December to the lowest level since September 2005. That, along with the recent uptick in revolving credit utilization, will not be sustainable without a more substantial pick up in income. Fortunately, the labor market continues to tighten, which in the long-run is supportive of better pay raises for Americans. Rising worker compensation, though, can also lead to broader price increases down the road, but for now inflation pressures remain muted. Indeed, the core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred measure of consumer inflation, has risen by just 1.5 percent over the past twelve months. That is a smaller gain than forecast and well below the FOMC's 2 percent “target.”
Sources: Econoday, U.S. DoC, ZH, FRBSLPost author: Charles Couch