Consumers Cautious as Spending Stalls
- U.S. Personal Income increased by 0.5 percent in December as wage income gained 0.4 percent.
- After inflation and taxes, Real Disposable Income increased by 0.3 percent in December.
- Personal Consumption Expenditures were unchanged for the month.
- The PCE Price Index increased by 0.1 percent in December. The core PCE Price Index gained 0.2 percent.
Incomes were up in December but spending was not and we cannot blame it on the weather. Total personal income increased by a solid 0.5 percent, supported by a 0.4 percent increase in wages and salaries. Also adding to the December gain was rental income which increased by 1.9 percent, the latest in a string of strong increases. Falling apartment vacancy rates are supporting rent increases which are showing up in the personal income accounts. Dividend income was up a robust 1.5 percent in December and is expected to be an ongoing support to overall personal income. After adjusting for nonexistent inflation and very existent taxes, real disposable income gained a respectable 0.3 percent for the month. Even though consumers felt a little more flush with cash, they did not spend it. Earlier speculation centered on warm December weather as a cause for weak spending on utilities, which shows up in the broad services category. However, that theory does not jive with today’s numbers. Total consumer spending for December was unchanged from November. Spending on durable goods decreased by 0.4 percent, and spending on nondurable goods also decreased by 0.4 percent. Consumer spending on services increased by 0.2 percent in December, not showing any drag from unseasonably warm weather. On a constant dollar basis, real consumer spending dipped by 0.1 percent in December. Inflation readings remain weak for the month. The personal consumption expenditure price index increased by just 0.1 percent after showing no gains through October and November. The core PCE price index (all items less food and energy) increased by 0.2 percent. Weak-to-nonexistent inflation through the fourth quarter of 2011 reduces a disincentive for more quantitative easing by the Federal Reserve later this year. On a year-over-year basis core inflation was up by 1.8 percent in December, under the Fed’s recently announced target of two percent. With incomes up and spending down, the personal saving rate ticked back up to 4.0 percent in December, from November’s 3.5 percent.
Today’s income and spending report for December reinforces the theory that consumers are still unable or unwilling to lead economic growth by spending more than they have. Depressed house prices remain a heavy drag on consumer spending. Consumers are still reluctant to load up on debt, but that may change through 2012. Non-revolving consumer credit is already heading up as auto sales lead to auto loans. Revolving credit (credit card debt) was flat through most of 2011, but did show a small increase in November. Moreover, the total household financial obligations ratio (debt payments as a percentage of disposable personal income) continues to fall, and is back to 1995 levels as of 2011Q3. So there is plenty of room for more household leverage once house prices stabilize and labor markets firm up.
Market Reaction: U.S. equities markets opened with losses. U.S. Treasury yields are down at both ends of the yield curve. Oil is down to $98.84/barrel. The dollar is up against the euro and down versus the yen.