Personal income increased in January but the gains were eaten up by rising prices.
Personal income rose 0.4%, exceeding a 0.3% expectation. Consumer spending figures also rose by 0.2% — but a sharp disappointment compared to the previous month’s 0.5% growth. With rising prices, however, the real value after inflation was -0.3%, leaving consumers with less buying power.
“The total money spent was up but prices were also up so there wasn’t an increase in consumption,” said Tom Simons, an economist at Jefferies Group in Manhattan. “People actually are spending more because they have to spend more because things are more expensive.”
Troubling though were consumer spending figures, which account for two-thirds of the country’s economic activity. Inflation grew by 1.9% from the same time last year — the highest it’s been since 2012 — and in line with the Fed’s 2% inflation target. This means the Fed will likely increase interest rates in the near future to curb inflation. Still, the gain in personal income equals an additional $63 billion in the hands of consumers.
“The economy is in good shape,” Simons said. “The probability of a recession coming anytime soon is quite low.”
Other indicators paint a more robust picture of consumer attitudes. Both retail sales and consumer confidence have increased in recent months. In December, consumer confidence was at its highest since Aug. 2001— up nearly four points. Meanwhile, in January, retail sales continued to increase on both non-durable and durable goods, excluding automobiles and utilities. Utilities make up a major portion of consumer spending and may have fallen because of an unseasonably warm winter across the nation.
All of this points to a solid economy with strong labor market conditions, steady wage gains and gas prices that are still relatively low and should lead to additional consumption throughout the year.
The personal income report, released by the Bureau of Economic Analysis on March 1, came just one day after President Trump’s first address to Congress where he stated that he “inherited a mess” of an economy. Yet the economy’s upward trajectory began before the election. The U.S. added a substantial 227,000 non-farm jobs in January while unemployment was just 4.8 percent — full employment by many economists’ standards.
Yet inflation pressures are still abound. If the Fed does increase interest rates it will be harder for individual consumers, like first-time home buyers, to borrow money. The Fed has forecasted as many as three interest rate hikes throughout 2017.
“Consumers are cautious,” said Rubeela Farooqi, an economist at Stone McCarthy Research Associates in Princeton, New Jersey. “Any shock in the economy is going to affect consumer psychology. Consumers were hit badly by the recession and haven’t forgotten that.”
“There’s a lot of uncertainty at the moment,” said Stan Shipley, senior managing director at the International Strategy & Investment Group in New York City. “It’s definitely cut into spirits.”
President Trump ran on a platform of increasing wages and lowering unemployment by ramping up infrastructure spending and cutting taxes. The question remains as to when.
“Trump has made a lot of broad comments about cutting taxes but no specifics,” Simons said. “We don’t know how they will play out over time. Consumers have a sense that Trump’s plan for the economy will help them.”