Personal income increased a better than expected 0.4 percent in December while personal spending increased 0.4 percent. Personal spending was revised up to 0.8 percent in November from 0.6 percent originally.
Personal Income Stronger in December
Personal income increased a better than expected 0.4 percent in December with no change reported to the 0.3 percent print in November. Meanwhile, disposable personal income increased 0.3 percent while real disposable personal income increased 0.2 percent after a flat month reported for November. Clearly, personal income, specifically real personal disposable income, has improved since its weak performance in late 2016 and early 2017. However, both measures continue to trail the growth rate of real spending, which improved further in the last quarter of the year.
This means that the saving rate remained low at the end of the year, at 2.4 percent, down from a 6+ percent rate in late 2015. That said, the U.S. consumer will need to see continuous growth in income over the year in order to be able to continue to keep up the current pace of consumption. It is true that the gains in consumer confidence as well as in financial (stock market) and housing wealth are making Americans feel much better today than they were previously.
Spending Boomed at the End of 2017
Personal spending was in line with expectations in December, up 0.4 percent. However, the November measure, which was originally reported at 0.6 percent, was revised to an increase of 0.8 percent. This means that November was a very strong month for consumption. In real terms, personal spending increased a weaker than expected 0.3 percent in December but the November number was upwardly revised to an increase of 0.5 percent. Therefore, the end of the year was one of the strongest performances for consumption in several years even though the year as a whole was not as strong as previous years.
The numbers on consumption during the last quarter of the year also show that consumption was on an upward trajectory at the end of 2017. This report also confirmed the strong performance of holiday sales reported several weeks ago. However, as we said above, the strength in spending may not last much longer if we do not see further improvement in income measures.
Of course, consumers are looking forward to an increase in income coming from the effects of tax reform. They could also be planning to increase borrowing in order to complement any short to medium term shortfall in income as they have been doing for more than a year.
PCE Index Remained Contained in December
Consumer prices, as measured by the PCE deflator, were in line with expectations, increasing 0.1 percent for the overall index and 0.2 percent for the PCE deflator excluding volatile items like food and energy. Thus, even inflation behaved well at the end of the year, supporting higher real income as well as higher real spending.
