Personal income grew less than expected and personal spending decreased more than expected in January. Still, both indicators are faring better on a year-over-year basis.
The January report, released by the Bureau of Economic Analysis, disappointed economists who hoped recent increases in wages and total number of jobs would translate into a growth in personal income.The discrepancy is likely due to the fact that most of the new jobs created are low income jobs. A decrease in number of hours worked also helps explain the difference.
Personal income growth remained at its Dec. rate of 0.3 percent, or $50.8 billion, falling short of the expected 0.4 percent. Personal spending fell by 0.2 percent, worse than the expected 0.1 percent.
With only modest gains in personal income and low gasoline prices, consumers seem to be to saving their extra cash, at least for now. The personal savings rate as a percent of disposable personal income was 5.5 percent in January, up from 5.0 percent in Dec.
“When looking at personal spending, much of the increased money from lower gas prices is going to pay for existing bills. So let’s say a family of four is saving an average of $80 per month, that’s going to accumulate very slowly to a point where we see it impacting, or slowing consumer spending in the short-term,” said Gennadiy Goldberg, U.S. strategist at TD Securities.
Despite falling short of expectation, personal income is up 4.6% year-over-year, while real PCE is up 3.4% year-over-year.
Friday’s GDP report showed the economy growing more slowly than expected. But economists are confident the economy will continue to grow. Modest gains will continue to slowly boost personal consumption, and consequently, the U.S. economy.
For now, consumers are choosing to spend less and save more. Personal saving rates confirmed increased by 5.5%, up from 5% in Dec.
Real disposable personal income picked up, however, despite stagnant growth in personal income. This is as a result of a decline in personal taxes. Personal current taxes decreased $1.8 billion in January, in contrast to an increase of $8.0 billion in Dec.
Some predict that personal income and personal spending will rise in 2015 if the number of jobs continues to rise.
“In the long term, when we get higher employment rates and job growth slows down, wage pressure will increase. Net job growth is the driving factor right now, but the dynamics of wages may play an important role in the future,” said Thomas Julien, economist at Natixis.
[By Marguerite Ward, CUNY on the Economy, March 2, 2015]