Income Still Distorted by Tax Changes, Spending Solid
- U.S. Personal Income increased by 1.1 percent in February after declining by 3.7 percent in January.
- Real Disposable Personal Income gained 0.7 percent after declining by 4.0 percent in January.
- Real Personal Consumption Expenditures were up by 0.3 percent in February, matching the January gain.
- The PCE Price Index increased by 0.4 percent in February as gasoline prices climbed.
U.S. economic data from the first quarter shows sustained momentum in the early stages of fiscal tightening. It is important to note that fiscal tightening is not a one and done event, but rather a process that will continue through this summer as Congress turns to longer term budget issues. We are likely to see more tax increases at the federal level, beyond the January increases in payroll, income, dividends and capital gains taxes. Also, we are still in the very early days of the federal budget sequester. Tighter spending at the federal level will show up as a drag on GDP and also weigh on government and private-sector employment. It will put more pressure on some states to increase tax collections. An interesting example is the reduction in federal payments to states for minerals extracted from federal lands, likely to leave gaps in some state budgets this year. California has taken the lead in raising state income and sales taxes, and may be followed by New York and other states. Squeezed state budgets may in turn put more pressure on local governments to raise revenues. Increasing property prices will support increased real estate tax collections.
Personal income increased by 1.1 percent in February, bouncing back from a 3.7 percent drop in January. The January drop in income came on the heels of a bounce in December as dividend payments were front-loaded ahead of tax hikes. The income data will clean up next month, responding more to economic fundamentals rather than to tax avoidance strategies. Real disposable income (after inflation and taxes) was up 0.7 percent in February. Spending has held up through the first two months of 2013, despite concern that lower and middle-income households were feeling the drag from higher payroll taxes. Real consumer spending increased by 0.3 percent in February, just as it did in January. The positive feedback loop between firming house prices and auto sales is helping there. There is still reason to be cautious about consumer spending due to conflicting consumer confidence readings for March. The Conference Board’s Consumer Confidence Index fell sharply in March after rebounding in February. However, the University of Michigan’s Consumer Sentiment index showed a slight improvement in March. Inflation was boosted by higher gasoline prices in February. The personal consumption expenditures price index for February gained 0.4 percent after flatlining for the previous two months. Excluding food and energy, the core PCE price index was up just 0.1 percent in February.
Market Reaction: U.S. financial markets are closed today in observance of Good Friday.
Click here for a PDF version of the Comerica Economic Alert: Personal Income 032913.