Real Income Close to Stall Speed, Savings Rate Stays Low, Disinflation Continues
- U.S. Personal Income was unchanged nominally in April, but falling prices helped.
- The PCE Price Index decreased by 0.3 percent in April as gasoline prices eased.
- After accounting for price declines and taxes, Real Disposable Personal Income gained 0.1 percent.
- Real Personal Consumption Expenditures were up by just 0.1 percent in April.
Income and spending data for April show that growth in real income and real spending cooled through the first quarter of 2013 and started the second quarter barely positive. Despite obviously improving conditions in residential real estate markets, household budgets remain tight as demonstrated by a personal savings rate that is now close to the very low levels we saw prior to the recession. The savings rate for April registered 2.5 percent, the same as for March. Moreover, the savings rate shows an ongoing declining trend since elevating to around 6 percent in 2008. Fortunately, homeowners are rapidly building equity in both their houses and their 401Ks, so household wealth is growing faster than the low savings rate implies. Nominal personal income was unchanged in April with no help from stagnant wage and salary income. After adjusting for declining prices and taxes, real disposable personal income gained a weak 0.1 percent for the month. The PCE price index declined by 0.3 percent in April due to falling gasoline prices. The core PE price index, which excludes food and energy, was unchanged in April. Over the last 12 months, the PCE price index is up just 0.7 percent while the core PCE price index has gained 1.1 percent. Nominal consumer spending declined by 0.2 percent in April. Real consumer spending gained 0.1 percent for the month, the weakest gain since Hurricane Sandy washed out auto sales last October.
Beyond just a soggy April income and spending report, today’s report has implications for near-term monetary policy. The FOMC next meets over June 18 and 19. It is shaping up to be a key meeting, with growing expectations that the Fed is contemplating tapering down its current program of asset purchases. We may also soon see revised forward guidance about the overall exit strategy from extraordinary monetary policy. Some fed officials favor beginning the tapering of QE as soon as the June meeting. Others remain concerned about weak job growth and lower-than-expected inflation. Today’s income and spending report appears to tip the balance in favor of those who would prefer to wait to begin the taper until the economy shows more strength. Expect no taper in June.