Personal income and spending rose again in January, the U.S. Bureau of Economic Analysis reports (pdf). The news offers fresh ammunition for arguing that the trend remains encouraging for two key pillars of the economy. But there's some fine print to consider. It remains to be seen how (or if?) the Middle East turmoil, and the associated rise in energy prices, will alter consumer behavior. As such, the February numbers may already be dated. Meanwhile, the jump in income last month was primarily due to a new cut in payroll taxes that began last month. Nothing wrong with that, of course, but it's not the same thing as saying that companies were handing out big raises last month.
On its face, disposable personal income (DPI) continues to look strong, rising 0.7% last month, up from December’s 0.4% rise. That’s the fourth consecutive monthly increase. But after excluding the lower payroll deductions that started in January, DPI gained only 0.1%, according to the government.
Personal consumption expenditures (PCE) advanced in January too, and for the seventh month running, but at a much slower rate: 0.2% vs. 0.5% in December. After adjusting for inflation, PCE actually slipped 0.1%.
“This sees a much weaker start to the year for the US consumer than the market had been looking for,” David Semmens, US economist at Standard Chartered Bank, tells the Financial Times.
The fact that payroll taxes were cut but didn't translate into a clear boost for spending may or may not be a sign that the recent rise in consumption is headed for a downshift. Optimists are once again quick to roll out the explanation that severe winter weather put a lid on trips to the mall. Maybe, but while spring is coming, there’s no obvious resolution for the Middle East trouble, which is a bigger and more enduring threat than snowstorms. Yes, you can argue that democracy and freedom is coming to Egypt and other nations in the region. But for the moment, that's just talk, and there's no shortage of reasons for wondering if the chatter about a new age of liberty in the Middle East will be more than just visions of grandeur in policy journals in the West.
The stakes are clearly high. As the chart below shows, the trend for income and spending has been favorable recently with both metrics posting convincingly stronger results on a 12-month rolling basis. The growth is still well below the pace logged in the pre-recession period, but at least the trend has been encouraging. The question now is whether this rebound is at risk?
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The potential for trouble is lower if job growth picks up. Whatever complications the Middle East throw our way will at least be minimized if the labor market grows at something more than a snail’s pace, which describes recent history as defined by net gains in nonfarm payrolls.
This Friday’s jobs report for February may bring better news. The crowd’s looking for a net gain of 193,000, according to Briefing.com. If so, that would be a considerably better number than January’s meek rise of 50,000. Even if the consensus forecast is right, and February’s update shows a gain of nearly 200,000 jobs for the economy, it’ll still be modest relative to what’s needed to reduce the 9%-plus unemployment by more than a token amount. Perhaps Friday will bring word of a surprisingly larger number. But woe to market sentiment if the number falls far short of expectations. Meanwhile, blaming a low number on snow just won’t cut it this time.