Personal Income Falls 3.6% as Dividend Payments Pull Back and Payroll Tax Hike Hits
Personal income fell 3.6% in January, worse than market expectations for a decline of 2.4%. The pullback came after December's one-time shot in the arm from dividend payouts, and as the payroll tax hike reduced income by $126.7 billion (annualized).
Personal consumption rose by 0.2% (in nominal terms), in line with expectations. In real terms, spending was up 0.1%, following a downwardly revised 0.1% in December (previously reported at 0.2%).
By component, real spending on nondurable goods and services were both up 0.3%, but spending on durable goods declined 0.8%.
With income falling, consumers dipped into their savings to fund consumption. The saving rate fell from 6.4% of disposable personal income in December to just 2.4% in January, its lowest level since November 2007.
Inflation as measured by the year-over-year change in the personal consumption deflator decelerated to 1.2% from 1.4% in December. Core PCE inflation (ex food & energy) fell to 1.3% from 1.4%.
Uncertainty about the tax environment prior to January led companies to payout significantly higher dividends in December. The magnitude of the fall in income in January is half a story of dividend payments returning to normal levels and half a story of higher payroll taxes. The fall in dividend payments subtracted 2.6 percentage points (pp) from income growth, while the payroll tax hike took an additional 0.9 pp.
While spending held up in January, the payroll tax hike is likely to show up in a reduced pace of spending over the next several months. Income growth will also be impacted by sequestration and the furlough of federal government workers in the April data and beyond.
With tax hikes and spending cuts buffeting the economy, growth in the first half of the year is likely to be at a sub-2% pace. At this pace, the unemployment will not improve and pressure will remain on the Federal Reserve to continue its asset purchase program.