Personal Income Growth Outpaces Consumer Spending

Total personal income increased by 0.4% in February after rising by the same amount in January, while personal consumption expenditures inched up by just 0.1%.

Personal income includes interest and dividends received by individuals; rental income; proprietors’ income; employer contributions  to employee pension and insurance funds as well as employer payroll contributions for government social insurance; government transfers to individuals; and of course, wages and salaries, the largest component of personal income for most Americans.

Total wages and salaries were up by 0.3% (or by $23.9 billion) in February, about half of the gain posted in January. Wages in private goods producing industries edged up by just 0.1% ($800 million), while wages in the much larger service sector increased by 0.4% ($21.0 billion). Wages in the public sector grew by 0.2%  to $2.1 billion.

Government transfers (social security, Medicare, Medicaid, unemployment insurance, veterans’ benefits) also provided a boost to personal income, rising by 0.6% over the month to $15.7 billion.

Real disposable income (adjusted for taxes and inflation) increased by 0.2% in February following a 0.9% jump in January. Real personal consumption expenditures declined by 0.1% after rising by 0.2% in January. Real consumer spending on durable goods dropped by 1.1%, while spending on nondurable goods was flat. Spending on services ticked up by 0.1%. With income growth outpacing spending for the second month in a row, American households increased their saving rate to 5.8%, the highest since late 2012.

On a year-to-year basis:

•        Real disposable income was up by 3.9%
•        Real personal consumption expenditures increased by 3.0%
•        Growth in real spending on goods (3.9%) outpaced spending on services (2.6%)

The current low inflation environment is helping lift consumer purchasing power although higher gasoline prices in February eroded some of that edge. Consumer prices were up by just 0.2% in February after falling by 0.4% during the previous month. Factoring out food and energy prices to arrive at core inflation, prices rose by just 0.1%. Food prices were up marginally (0.1%), while the index for energy goods increased by 1.0%, a sharp change in course after a long string of monthly declines. Over the year, consumer price inflation was just 0.3%, considerably below the Federal Reserve’s target range of 2.0%.

Consumer spending was weaker than expected last month, adding to a number of other indicators that point to a lower rate of GDP growth in the first quarter of 2015. On the other hand, personal income growth and real disposable income have been strong and increases in the saving rate over the last few months may support high consumption expenditures going forward. 

Source:  http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm