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US: Personal Income Rises While Spending Continued to Decline

  • Personal income surprised to the upside, increasing by 0.6% month-on-month in December, well ahead of market expectations for a modest 0.2% increase. The main contributors to the increase were higher government transfer receipts (+2.3% m/m), income receipts from assets (2.0% m/m), and compensation (0.5% m/m).
  • Notably, wages and salaries in service-producing industries rose by 0.6% on the month, and 3.5% year-on-year. Offsetting some of these gains was a 0.2% month-on-month loss in proprietors’ income, which declined for the third consecutive month as support from the Paycheck Protection Program dissipated.
  • Subtracting inflation and taxes, real disposable income rose by 0.2% on the month and 3.3% year-on-year.
  • Nominal spending declined by 0.2% month-on-month, less than expected by the market (-0.4% m/m). Stripping out price effects, real personal consumption expenditures were down by 0.6% month-on-month. Both goods and services spending posted contractions of 1.4% and 0.2%, respectively. Within goods, the main contributor to the decline was spending on non-durables, which decreased by 1.4% m/m. Durables declined by 1.3% m/m.
  • Real spending finished the year 3.3% lower relative to December 2019. The contraction in usually recession-resilient services spending was too heavy a blow to the aggregate, contracting 7.2% year-on-year, offsetting the 5.5% year-on-year growth in goods.
  • On the prices side, the PCE deflator moved higher, increasing by 0.4% month-on-month, surprising markets by +0.3 percentage points. Excluding food and energy prices, the core PCE deflator was up 0.3% month-on-month in December, up from a flat reading in November. This is the first increase in the Fed’s preferred measure of inflation since September. In year-over-year terms, core inflation stood at 1.5% last month, up one tick from the November reading.
  • The personal saving rate increased to 13.7% in December, up eight tenths of a percentage point from November. The saving rate remained elevated relative to the average of 7% observed before the pandemic.

Key Implications

  • Consumer spending continued to lose momentum towards the end of the year. Still, the increase in personal income a first sign of positive news to come, suggesting that the recent deterioration in spending is transitory. No doubt, issuance of the second round of payments, which started at the end of December, helped boost American consumers’ mood. Equally important is the tenacity of wages & salaries, especially those of the private sector, which ended the year at 3.2% higher than last year. Likewise, proprietors’ income finished the year with a 3.0% year-on-year gain, despite the recent pull-back.
  • The outlook for personal income and spending is positive: additional income support, extended forbearance programs and substantial savings should supercharge consumption by high-income families and, importantly, restoring the spending power of financially vulnerable households. In fact, high-frequency data suggest that consumer spending is already on the mend in January, with spending by low-income households leading the way. Inflation re-emergence may be the only reason for caution, but at this point it’s too early for policymakers to get worried.
  • The emergence of more infectious variants of Covid-19 in the U.S. give reason to remain alert. Still, the speed of infections shows early signs of waning, with daily cases dropping over the past three consecutive weeks. To date, 27.3 million shots have been administered and some scientists suggest that the U.S. may be entering early stages of herd immunity. President Biden’s dominant priority of getting the pandemic under control by accelerating vaccination efforts and providing additional fiscal supports should help accelerate economic growth momentum in the coming months.
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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