June 30, 2017 Reading Time: 2 minutes

Pre-tax and after-tax personal income posted solid gains in May, rising 0.4 percent and 0.5 percent, respectively, according to data from the Bureau of Economic Analysis. Combined with a modest 0.1 percent in personal consumption expenditures, the personal saving rate rose to 5.5 percent, the highest since September. A broader measure of savings from the Flow of Funds accounts shows the personal saving rate at 8.9 percent in the first quarter of 2017. The more comprehensive FoF measure shows the personal saving rate has been in the 7 to 10 percent range for most of the past six years. Both the BEA measure and the FoF measure have been trending higher since the lows of 2005.

The 0.5 percent gain in personal income was led by a 1.7 percent increase in income on assets (interest income and dividends). Over the past year, income on assets has risen 3.8 percent. Other contributors to the rise were rental income which rose 0.7 percent in May and proprietors’ income which rose a healthy 0.6 percent for the month.

Personal tax payments fell 0.2 percent for the month, helping push after-tax income up by 0.5 percent in May. In real terms, real personal income excluding transfers rose 0.5 percent for the month while real disposable income gained 0.6 percent. Over the past year, real disposable income is up 2.2 percent.

On the spending side, total personal consumption expenditures rose a modest 0.1 percent in May. Among the components, durable goods fell 0.3 percent and nondurable goods spending declined by 0.5 percent. These were offset by a 0.3 percent rise in spending on services. After adjusting for price changes, real PCE rose 0.1 percent as a 0.1 percent decline in real durable goods spending was offset by a 0.2 percent and 0.1 percent increase in real nondurable goods and real services, respectively.

The price indexes from the personal income and spending report are the primary measures followed by the Federal Reserve. The total PCE price index fell 0.1 percent in May as a 0.2 percent increase in services prices was more than offset by a 0.2 percent decline in durable goods prices and a 0.8 percent drop in nondurable goods prices. 

Over the past year, the PCE price index is up 1.4 percent, down from a 1.7 percent rise in April and a recent peak of 2.1 percent in February. Among the components, the core PCE index, which excludes food and energy prices, is up 1.4 percent from a year ago, similar to the total PCE price index. That coincidence is a result of a 0.1 percent drop in food prices over the past year offsetting a 5.3 percent jump in energy prices.

Overall, gains in 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. On the prices outlook, a 1.4 percent increase over the past year is below the Fed’s target but statements from Fed members suggest they believe the slowdown in recent months is likely transitory.  Therefore, the Fed is unlikely to alter the current slow pace of policy normalization. Together, these suggest a positive outlook for the economy with a low probability of recession over the next several months and quarters.

Robert Hughes

Bob 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.

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