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Real Time Insight

In December Total Personal Income rose by 0.5%, or by a total of $61.3 billion, above the consensus expectations for a 0.4% rise. In November personal income rose by just $7.4 billion, so we had a very significant acceleration.  Personal spending (Personal Consumption Expenditures) fell by $2.0 billion or less than 0.1%.  In November personal spending rose by $11.4 billion or slightly less than 0.1%. 

If income rises more than spending, it means the savings rate is rising.  It climbed to 4.0% from 3.5%.  That is still a low rate relative to both the long sweep of history and versus other major economies.  It is however sharply higher than the near zero rates that were the norm before the Great Recession hit.  Over the long term, a higher savings rate is a very good thing, however a rising savings rate acts as a brake on the economy.  It means that the marginal propensity to save is far higher than the average propensity to save.  It is the marginal, not the average, propensity to save that governs the size of the multipliers.

The quality of income was very high.  Wage and Salary income rose by 29.5 billion after actually falling by $1.4 billion in November.  That was overwhelmingly due to private sector wages.  Government wages rose by just $400 million (that is at all levels of government).  Non-farm Proprietors income, a proxy for small business income rose by $5.8 billion after a rise of $3.5 billion in November.  Income from assets was mixed.  Interest income fell by $3.1 billion, matching its November decline.  Yes there is a cost to the low interest rate policy being perused by the Fed.  Dividend income on the other hand rose by $12.3 billion after a $2.6 billion rise in November. 

Transfer income increased by $13.2 billion, a big increase over the $400 million rise in November.  Higher Social Security payments were responsible for most of that, rising by $9.7 billion, up from a $1.2 billion rise in November.

The increase in income, and particularly the healthy composition of that rise is good news.  The stagnation in spending is not.  The rise in the savings rate does help shore up the foundations of the economy, but it is holding back the current rate of economic growth.  All in all, not a bad report.

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