Personal spending looks strong, but the personal income side of the ledger still looks troubling, according to today’s December report from the US Bureau of Economic Analysis. Indeed, the year-over-year growth rate for disposable personal income (DPI) turned negative last month for the first time in four years. Personal consumption expenditures, by contrast, rose 3.6% for the year through December—the best annual jump in a year. The optimistic spin on the weak income data is that it’s suffering from a temporary bout of various seasonal distortions and/or the end of jobless benefits for 1-million-plus jobless workers last month. Only time will tell if the sharp decline in income’s trend is noise or something darker. Clarity is going to take a couple of months at the earliest. Meantime, let’s review the numbers in search of some perspective on how the data stacks up at the moment.
On its face, the annual pace for income is certainly worrisome. DPI fell 1.7% in 2013’s final month vs. the year-earlier figure. The fact that the drop was accompanied by a dramatically softer growth rate in the annual pace of private-sector wages suggests that more than a technical glitch in the data may be lurking. Indeed, wages are a crucial driver of economic growth. It doesn’t take a rocket scientist to recognize that if wages in the private sector are stagnant or (worse) for more than a brief period, the economy will suffer eventually.
The good news is that comparatively strong consumer spending is offsetting the weakness in DPI. If the economic outlook is considerably brighter than the weak DPI data imply, we’ll see a revival in income’s growth rate in the near term. It’s too soon to dismiss that possibility. In fact, a broad review of macro and market indicators lean toward that view, as the latest US Economic Profile shows. The question, of course, is how this broad profile holds up in the near term?
On that note, it’s worth reminding that it’s never a good idea to read too much into one indicator. We’ve seen numerous times in recent years that the rush to judgment by way of a handful of indicators has a habit of dispensing unreliable signals. As such, it’s still premature to assume the worst based on today’s soft income numbers.
That said, I’ll be sifting the incoming January data closely for any signs that the macro trend has turned wobbly relative to the generally upbeat December profile, which is largely intact in terms of the first round of published data. January, on the other hand, is still largely a mystery.
“Bottom line, spending was good but spenders are drawing on savings in order to drive it,” says Peter Boockvar at the Lindsey Group. “Hopefully soon we’ll see a pickup in income growth as anecdotal signs of wage pressures are beginning to arise.”