Income Gains Plus Home Equity Accumulation Equals Steadier Consumer Spending
- U.S. Personal Income increased by 0.5 percent in May, driven by interest and dividend income.
- After accounting for inflation and taxes, Real Disposable Personal Income gained 0.4 percent in May.
- Real Personal Consumption Expenditures were up by 0.2 percent in May.
- Initial Claims for Unemployment Insurance fell by 9,000 to hit 346,000 for the week ending June 22.
- Real GDP growth for 2013Q1 was revised down to 1.8 percent from the previous 2.4 percent.
With four consecutive solid monthly gains in real disposable income, homeowners’ equity rapidly accumulating, and the damage to households’ 401Ks largely repaired, consumer spending has ample support to resist the downdrag from still-tightening fiscal policy. Nominal personal income gained 0.5 percent in May as interest income increased by 1.9 percent and dividend income was up by 1.6 percent. Wage income gained a moderate 0.3 percent for the month, held in check by unspectacular job growth and only limited pressure on wage rates. After adjusting for a slight 0.1 percent increase in the personal consumer expenditure price index, and a 0.8 percent increase in tax collections, real disposable personal income was up a solid 0.4 percent in May. The personal saving rate increased to 3.2 percent, off its low of 2.2 percent in January. This looks like a healthy bounce off the bottom rather than a sign of consumer anxiety. Real consumer spending increased by 0.2 percent in May. Expectations for stronger auto sales in June, bolstered by rising consumer confidence, suggest that households are getting some of their mojo back.
Initial claims for unemployment insurance fell by 9,000 for the week ending June 22, to hit a level of 346,000. The downtrend in UI claims visible through the first quarter of this year stalled in the second quarter. Employers have remained somewhat cautious in hiring due to a heightened and extended awareness of uncertainty, emanating both from domestic policy and sluggish global demand growth. However, factors are lining up that may support stronger hiring later this year and into 2014. First, the drag from fiscal tightening will start to diminish late this year. Second, the hiring uncertainties related to the Affordable Healthcare Act will start to lift late this year. Finally, solidifying household balance sheets will lead to a more resilient consumer. There is still plenty of pent-up demand out there waiting to be fulfilled.
Momentum in real estate markets, firmer consumer spending, improved hiring, and nascent improvement in European economies could set the stage for the next phase of the Great Policy Unwind, allowing the Fed to start backing off of QE3 later this fall. Plausible story….time will tell.
Market Reaction: U.S. equity markets are up. The yield on 10-year Treasury bond is down to 2.50 percent. NYMEX crude is up to $96.90/barrel. The dollar is up against the yen and the euro.