Real Disposable Income Contracts Rapidly in Q1, Spending Supported by Credit
- U.S. Personal Income increased by a modest 0.2 percent in March as job growth cooled.
- Real Disposable Personal Income gained 0.3 percent in March after declining by 4.0 percent in January.
- Real Personal Consumption Expenditures were up by 0.2 percent in March.
- The PCE Price Index decreased by 0.1 percent in March as gasoline prices eased.
Income and spending data for March show modest gains after adjusting for inflation. But for the first quarter as a whole, real disposable personal income (after inflation and taxes) showed the biggest quarterly drop since the Great Recession. Real disposable personal income contracted at a 5.3 percent annualized rate in Q1 due primarily to the drag from the payroll tax increase that took effect in early January. Despite the drag on spendable dollars, real consumer spending for the first quarter increased at a solid 3.2 percent annual rate. The divergence of income and spending in Q1 cannot be sustained indefinitely. Weather effects made car sales look better in Q1 than they really were by depressing sales last October. Also, consumers still appear to be willing to take on cheap auto loans to buy very affordable cars. The personal saving rate has taken a step down as households try to maintain consumption while paying higher taxes. The saving rate for February and March was 2.7 percent, well below the near 3.5 percent saving rate we saw for much of last year. The rate spiked up to 6.5 percent in December as households steeled themselves for higher taxes, but now looks close to the dangerously low levels we saw prior to the recession. On the positive side, households are building equity in their homes quickly with the help of rising prices and low mortgage rates. Also, the Q1 bull run in stock prices has helped to ease the drag from weak wage growth.
In the current second quarter, expect consumption and income to line up more closely, with both showing only modest gains. Job growth remains the key ingredient for a vigorous economy. March was disappointing with just 88,000 payroll jobs added. April should do better, adding about 160,000 jobs, still not a huge number. The jobs numbers for April are due out this Friday morning. Inflation remains well contained. The PCE price index declined by 0.1 percent in March as gasoline prices rolled back. Over the previous 12 months, the PCE price index is up by just 1.0 percent. The core PCE price index (less food and energy) is up a tame 1.1 percent over the past 12 months. Low inflation and weak job growth will keep current highly accommodative Federal Reserve policy in place. No changes are expected to the near‐zero fed funds rate and to the current rate of bond purchases for QE3 at the upcoming two‐day FOMC meeting (this Tuesday and Wednesday).
The Pending Home Sale Index increased by 1.5 percent in March, following a 1.0 percent decline in February. This implies a reversal of the dip in existing home sales that we saw in March; down by 0.6 percent.
Market Reaction: U.S. equity markets opened with gains. The yield on 10‐year Treasury bond is down to 1.66 percent. NYMEX crude is up to $93.67/barrel. The dollar is up against the yen and down versus the euro.