September Income and Spending

Income Increases the Most Since March, Nullified by Inflation

  • U.S. Personal Income increased by 0.4 percent nominally in September, boosted by proprietors.
  • Real Disposable Personal Income was unchanged in September as energy prices increased.
  • September Personal Consumption Expenditures were up by a strong 0.8 percent before inflation.
  • The PCE Price Index gained 0.4 percent in September, boosted by higher gasoline prices.

Consumers outspent their incomes again in September. Improving consumer confidence and credit availability in the presence of pent-up demand is a potent combination, capable of fueling consumer spending even as job growth remains weak and wage gains are meager. In September, personal income increased by 0.4 percent, the largest increase since last March. Gains to headline personal income were driven by proprietors’ income, which increased by 1.1 percent, and by dividend income, which gained 0.9 percent. After inflation and taxes, real disposable income was unchanged for the month. Inflation in the monthly income and spending report is measured by the personal consumption expenditures price index. The PCE price index increased by 0.4 percent for the month, fueled by energy prices which gained 4.8 percent. Nominal personal consumption increased by 0.8 percent, again pushed by gasoline sales. After adjusting for inflation, real personal consumption was up 0.4 percent. With real incomes flat and real consumption rising, the personal saving rate decreased to 3.3 percent, its third consecutive monthly decline.

The moderate gain in consumer spending in September appears to be out of synch with the payroll jobs data, which has been weak. The disconnect between spending and wages can continue if consumers are willing to drive the saving rate down and/or increase their use of credit. There is a limit to how far the saving rate can fall. At its current 3.3 percent, there is still room to drop, but any further decrease would have to be viewed as unhealthy. Right now credit is the key factor in the spending-wages disconnect. With household leverage ratios now near modern-day lows, there appears to be ample upside potential for increasing consumer credit.  It would be reasonable to expect consumer credit to increase at this point of the economic cycle. However, when we consider the upcoming Fiscal Cliff, the analysis gets complicated. Credit availability could potentially tighten up in a Fiscal Cliff-induced recession in 2013. This could pull the rug out from under consumer spending, compounding the drag from the Fiscal Cliff.

Market Reaction: U.S. equities markets are closed due to Hurricane Sandy. U.S. Treasury yields are down at both ends of the yield curve. Oil is down to $85.36/barrel. The dollar is up against the euro and the yen.

Click here for a PDF version of the Comerica Economic Alert: Personal Income 102912.

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