U.S. Personal Income - The Next Interest Rate Change May Be In The Summer
- We have the latest figures for U.S. personal income, expenditure and the deflator.
- These show that, with some bumps along the way, the economy continues to grow reasonably.
- The latest best estimate of another interest rate cut is, therefore, in the summer.
Growth and interest rate cuts
Whether we get another interest rate cut at all depends upon the idea that growth in the economy falters at some point. The general view is that growth will slow, for economic expansions simply never do go on forever. We also don't expect some wild burst of inflation that pushes rates up.
So, the question becomes, well, when do we think there will be another change in interest rates from the Federal Reserve? A couple of months back, the betting was that it would be about now, in December. This prospect has receded, and the current suggestion is that interest rates will remain where they are now until the summer, barring any changes in circumstances.
The is supported by these latest figures for personal incomes, expenditures and the associated deflator.
The three numbers here all come from the same Bureau of Economic Analysis report:
Personal income increased $3.3 billion (less than 0.1 percent) in October according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) decreased $12.6 billion (-0.1 percent) and personal consumption expenditures (PCE) increased $39.7 billion (0.3 percent).
Real DPI decreased 0.3 percent in October and Real PCE increased 0.1 percent. The PCE price index increased 0.2 percent. Excluding food and energy, the PCE price index increased 0.1 percent.
It's worth unpicking that presented altogether like that, it might not make much sense.
(Personal income from Moody's Analytics)
As we can see, total personal income moved barely at all. But within those numbers, there is something more interesting. Labour incomes from wages rose 0.4%, which is the sort of amount we like to see. It shows the workers are gaining from the economy, which is rather the point of our having an economy in the first place. It was proprietors' (i.e., small business) and asset incomes which fell back to give the nearly flat total reading.
We also have a fall back in the savings rate from 8.1% to 7.8%, which is usually taken as a sign of consumer confidence. People tend to save less when they're feeling richer and more confident about the future.
(Personal expenditure from Moody's Analytics)
As we would expect, these numbers do actually have to add up. If incomes are, in total, flatlining but expenditures are still rising, then that money has to be coming from somewhere. Which is that drop in the savings rate coming through again in order to balance the numbers.
What this is telling us is that the people are still out there spending. We're not seeing any fall - indeed, we're seeing a continuing rise - in consumer demand. As this is some 70% of the economy itself, it is good news for economic growth.
Personal consumption deflator
This is the inflation rate which applies to this personal spending. It's also the inflation rate which the Federal Reserve uses as its target for inflation.
To explain that, there are a number of different ways we can measure inflation. Consumer price index, for example, that itself comes in several different flavours - urban, all people, the elderly and so on. Some countries use the retail price index (the difference with the CPI is the inclusion or not of housing costs), and there are also other possibilities. The PCE rate is what the Fed uses. The idea being that, well, personal expenditure is what people actually spend, so that's going to be a pretty good estimator of the inflation that people actually see in their spending.
The Fed's inflation target is low unemployment consistent with an inflation rate of about 2%. This is the version of inflation it uses as that target:
(PCE deflator from Moody's Analytics)
One more technical detail here. We know that food and fuels can vary in price considerably over short periods of time. Further, that such variances aren't necessarily indicators of a change in the general price level. Bad weather can move either of them; for example, prices reverting when the influence of that weather has passed. Thus, we pay more attention to the core PCE rate than we do to the more general one - "core" here meaning that we look at everything except food and fuel.
This concentration upon core PCE is not just a general market insistence, it's a stated one from the Fed. This is the inflation measure it targets. The important information is thus in here (from the Bureau of Economic Analysis report):
The PCE price index increased 0.2 percent. Excluding food and energy, the PCE price index increased 0.1 percent.
Moody's Analytics tells us what that is year on year:
The core PCE deflator, which excludes food and energy, increased 0.1%, in line with our forecast. On a year-ago basis, the core PCE deflator was up 1.6%, compared with 1.7% in September.
As ever with these macroeconomic numbers, we're looking for two different things. Firstly, signs of something we should worry about directly - there is nothing here for us to be concerned about. The second is that the Fed and others are trying to manage that macroeconomy and they have access to the same information we do - even if a day or two before we do. Thus, we're also trying to predict their actions with reference to this information.
The Fed is looking for a low unemployment rate consistent with about 2% inflation. It uses the core PCE as the inflation rate to target. This is still below target, even if only just. We're thus not going to have an increase in interest rates to head off the inflation that isn't there.
However, that inflation rate isn't so far below target that the Fed is going to want to lower rates in order to goose it up to target - yes, the Fed's inflation target is symmetrical, it doesn't want to be far below or far above that.
Thus, we'd expect no move on interest rates in the near future.
The investor view
The Fed's Jerome Powell is on record as stating that as long as growth continues, there will be no change in Fed interest rates:
Fed’s Powell says interest rates unlikely to change as long as growth continues
That's a paraphrase to fit a headline but captures the essence well.
We don't expect to see any further slowdown in growth for some months yet. Inflation's not a threat either, running a little below target. So, the current best-informed view is that there will be no change in interest rates until the summer. Perhaps June for a further cut, if growth does slow.
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