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Personal Income and spending

Thursday, March 4th, 2010

Texas Border Business

Growth in personal income slowed to 0.1% in January after rising 0.3% in December. Personal income also rose 1.1% year-over-year, marking the first month since December 2008 that the component came in above the previous year’s levels.

Positive news from the personal income components is that wages grew 0.4%, the largest monthly increase since April 2007. However, the rise was partially compensated for by a 3.0% decline in personal dividend income and a 0.3% drop in proprietors’ income.

In real terms, personal disposable income dropped 0.6% after rising for the previous five months. This decline could indicate that growth in PCE could slow in the upcoming months.

Consumer demand continued to gain momentum in January as PCE rose 0.5% following a 0.3% increase in the previous month. In real terms PCE rose 0.3% with positive contributions across all components: durable goods jumped up 0.7%, non-durable goods rose 0.8% and services increased 0.1%.  Real PCE has risen on a year-over-year basis for five of the past six months, which is a positive sign for the recovery of consumer spending.

The personal savings rate dropped from 4.2% to 3.3%, the lowest level since October 2008. While this result could help explain this month’s increase in spending, the savings rate is volatile on a monthly basis, so the decline does not necessarily indicate a downward trend.

Bottom-line: Consumer demand continued to expand in January. One factor that could determine future demand growth is personal income. The upward trend in wages could be a positive sign that consumers will be in a better position to spend; however, wage growth could be limited by a slow recovery in the labor market. The results of today’s report are in line with our expectation of a moderate increase in consumer spending in 2010.

Source: US Economic Research Department

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