Personal income rebounded in January, rising by 0.6% month-on-month, handily beating market expectations of 0.4%. Even when stripping out price effects, income growth was strong. Following a contraction in December, real disposable income advanced by 0.5% in January.

While income bounced back, spending growth slowed to 0.2% m/m from 0.4% in December, and was a touch below market expectations (+0.3%). In real terms, growth was nearly flat at 0.1%, and was also below consensus forecasts (+0.2%).

On the prices side, inflation pressures were softer than expected. The overall PCE deflator ticked up by 0.1% m/m, and was 1.7% higher than it was a year ago. Both measures were 0.1 percentage points below market expectations. The same was true for the core PCE deflator which came in at 0.1% on the month and 1.6% y/y.

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Key Implications

On the whole, today’s release was a mixed bag. Growth in spending was muted and price inflation was soft. While these are data for only one month, spending has decelerated from the strong gains observed over the first half of 2019.

Income, on the other hand, surged in January reflecting a sharp rise in wage and salaries as well as social security benefit payments. In normal circumstances, these gains would filter through to stronger spending in the months ahead, but with coronavirus fears entering the psyche, consumption could be weaker in the coming months than income fundamentals would suggest.

In its recent communication, The Federal Reserve had noted that consumption has moved from solid to decent growth. Today’s release was broadly in line with that narrative. However, the Fed will likely be increasingly concerned with the spread of COVID-19. If the virus continues to disrupt supply chains, and weigh on economic activity and confidence, the Fed might be forced into action to provide some relief during this time of turmoil.


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