Income and Spending Post Solid Gains in August as Price Increases Moderate

Personal income rose 0.3 percent in August, according to data from the Bureau of Economic Analysis. The gain in personal income was supported by a 0.5 percent increase in wages and salaries. Wages and salaries account for about half of personal income. Supplements to wages and salaries (primarily employer contributions to pension and insurance funds and government social-insurance programs) account for another 12 percent of personal income and posted a 0.3 percent rise in August. Proprietors’ income increased 0.3 percent for the month while income on assets (interest and dividends) fell 0.1 percent. Personal tax payments rose 0.4 percent, leaving disposable income with a gain of 0.3 percent. From a year ago, personal income has risen 5.3 percent while disposable personal income has gained 5.2 percent (see chart).

On the spending side, total personal consumption expenditures (PCE) rose 0.3 percent in August. Among the components, durable goods dropped 0.1 percent and while nondurable-goods spending rose by 0.5 percent. Spending on services increased 0.4 percent for the month. After adjusting for price changes, real PCE increased 0.2 percent as a 0.2 percent gain in real durable-goods spending was accompanied by a 0.4 percent gain in real nondurable-goods spending and a 0.2 percent rise in real services. The personal savings rate, which was revised sharply higher in the benchmark NIPA revisions released in July, held steady at 6.6. A more comprehensive measure of savings is available in the quarterly flow-of-funds data from the Federal Reserve. That measure has typically shown a higher savings rate compared to the measure in the monthly personal income release.

The price indexes from the report on personal income and spending are the primary measures followed by the Federal Reserve. The total PCE price index increased 0.1 percent in August as durable-goods prices fell 0.3 percent, nondurable-goods prices rose 0.1 percent, and services prices increased 0.2 percent.

Over the past year, the PCE price index is up 2.2 percent, slightly behind the 2.3 percent recorded in July (see chart). Among the components, the core PCE index, which excludes food and energy prices, is up 2.0 percent from a year ago while the market-based PCE price index excluding food and energy is up 1.7 percent. That measure has been running below 2 percent since 2012.

The final September results from the University of Michigan Surveys of Consumer Sentiment show overall consumer sentiment jumped 3.9 points to 100.1 versus the final August result of 96.2. That is just the third time since 2004 that the index has breached the 100 threshold. For the University of Michigan consumer-sentiment survey, both sub-indexes had strong performances in September. First, the current-economic-conditions index rose to 115.2 from 110.3 in August. That is a 4.4 percent gain for the month and a 3.1 percent increase from September 2017. The second sub-index — consumer expectations, one of the AIER leading indicators — rose 3.9 percent for the month and showed a 7.2 percent gain from the prior year, to a level of 90.5. The expectations index is close to the cycle high and matches the reading from October 2017. The increase was largely due to more favorable views on jobs and income.

Overall, gains in disposable personal income should provide support for future increases in personal consumption. Healthy incomes, solid balance sheets, a tight labor market, and high levels of consumer confidence all suggest the outlook for consumers remains favorable. The data suggest the Fed is unlikely to significantly alter the current slow pace of policy normalization. Together, these support a positive outlook for the economy with a low probability of recession over the next several months and quarters.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.