Fundamental Analysis

US: Just in Time: Income to the Rescue of Consumers But...


Personal income increased 0.4 percent in October, just in time for the holidays while spending growth slowed down but remained strong, up 0.3 percent, after a downwardly revised increase of 0.9 percent in September.

Finally Some Help from Income Growth

After a recent relatively long spell of weak income growth, the October release of personal income pointing to, perhaps, an improving path for income growth is a refreshing sign. Of course, a month does not make a trend, so we remain cautiously optimistic regarding the last two months of the year. Furthermore, we believe that income growth has to continue to improve for the right reasons in the next several quarters due to the still strong showing from the labor market.

Nominal disposable personal income was up 0.5 percent in October while real disposable personal income was up 0.3 percent, a notable improvement after a sequence of -0.1 percent, 0.1 percent, -0.1 percent, and 0.0 percent, during the June-September period, respectively. October marks the highest monthly rate since May of this year. Still, the increase in real disposable personal income has not come from much stronger wages and salaries. In fact, personal income increased by $65.1 billion in October versus an increase of $69.1 billion in September, with much of the weakness coming from wages and salaries of private industry workers. Wages and salaries of private industries increased $23.0 billion in October versus $33.7 billion in September. At the same time, Americans got higher income from receipts on assets, up $19.2 billion in October versus only $10.3 billion in September. But perhaps the largest help for disposable personal income was the fact that Americans paid $14.3 billion in personal current taxes in September while having a "tax rebate" of $1 billion in October. That is, all what was good for personal income but especially disposable personal income seem to have been one-off rather than something that will continue in the next several months.

Thus, it is clear that income is still constrained and our expectation that income is going to start increasing has not yet materialized. Thus, we remain cautiously optimistic for the holiday season.

Spending Growth Weakens in October

On the spending side, we were expecting some weakness because of the strong showing in September. Personal spending increased 0.3 percent in nominal terms but only 0.1 percent in real terms after increases of 0.9 percent and 0.5 percent, respectively in September.

This may indicate trouble ahead for consumption during the last quarter of the year; however, we believe that conditions remain positive for a strong showing in consumer demand during the final quarter. Positive conditions are supported by the strong showing in consumer confidence, a very strong labor market, this past month's improvement in real disposable income, plus the slight improvement in the savings rate. Thus, we are still positive on the spending picture going into the holiday sales season.

Author: Wells Fargo SecuritiesWebsite:
Wells Fargo Securities
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