Disposable personal income (DPI) in December surged by 2.7% compared with November's level, although the gain "was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates," the government advises. By contrast, personal consumption expenditures increased a modest 0.2% last month, or about half the rate in November.
The temporary special payments that dramatically raised the growth rate of DPI last month makes it difficult to analyze the data as it relates to the business cycle. We'll know more in a month on this front when the data normalizes. As for personal consumption, the December gain was sluggish, but the increase marks the ninth rise in 2012 vs. three monthly declines for PCE last year.
Looking at the year-over-year changes for DPI and PCE shows continued growth. The sharp annual increase for DPI at 2012's close is suspect, due to the special payments last month. PCE, meanwhile, advanced 3.6% for the year through December, or roughly in line with the annual pace in recent months. Consumer spending, in short, continues to grow but at an unspectacular rate.
RBS economist Guy Berger notes "a fair amount of resilience in demand" in the consumer sector. "But, this quarter doesn’t look great for spending as there will be some intense headwinds."
For now, the income and spending numbers continue to support the case for expecting modest growth. The question is how far last month's unusually strong DPI will retreat back to a "normal" range in the January report? As for the implications on spending, the optimistic outlook is that the large injection of income into households last month will smooth over some of the rough edges when it comes to consumption in this year's first quarter.
Maybe, but this is no time for blind optimism. The potential for across-the-board spending cuts in federal spending in March lurks just around the corner unless Congress intervenes. "The biggest threat to the recovery now appears to be Washington," the Washington Post reminds.
That's a warning that resonates strongly after yesterday's unexpected drop in fourth-quarter GDP, due largely to an unusually steep drop in defense spending. Yes, the business cycle seems to be heavily dependent on government largess at the moment. Is this something new? Or has the dependency been there all along, and we simply overlooked this fact in a period when spending more was assumed to be locked in stone? But that's an assumption, as we learned yesterday, that's in immediate need of an attitude adjustment.