Incomes Moderate, Spending Tepid in January

The effects of the government shutdown continue to cloud our visibility on the performance of the economy. The personal income and spending data released for February included the missing spending and inflation data for January and only a preliminary look at the income data for February. Delays in the data are a real problem for the Federal Reserve as they are further complicating their assessment of the slowdown in growth. We still don’t have two critical measures of consumer spending and inflation for February despite being almost into April.

Real (inflation-adjusted) disposable incomes fell 0.2% in January despite a jump in social security benefits, which includes the child tax credit and the Affordable Care Act refundable tax credit. It is also notable that the government counted the pay of government workers who were not actually receiving paychecks during the month because Congress voted to pay furloughed government workers later, once the government reopened. The largest loss during the month was in dividend income, which surged in December. The move in December was so unusual that the Bureau of Economic Analysis (BEA) cites the one firm responsible, VMware Incorporated, in the December data.

Real personal consumption outlays rose a tepid 0.1% in January after falling 0.6% in December. Losses were largest in the vehicle sector. Consumers are now merely replacing older vehicles, having tapped pent-up demand. High-income households are dominating the market and buying more expensive, larger SUVs instead of cars. Compact car sales are doing poorly.

The saving rate edged down to 7.5% in January after surging to 7.7% in the wake of that one-time dividend payment in December. That is well above the 6.7% pace of the fourth quarter and could mean more spending in the months to come. I would caution that the counting of government paychecks that were not paid until well into February distorted our read on overall saving.

The personal consumption expenditures (PCE) index, which the Fed uses as its inflation target, fell 0.1% in January and slowed to a 1.4% pace on a year-over-year basis. That represents a 0.4% cooling in inflation from the December year-over-year reading of 1.8%. Much of the cooling in inflation can be traced to a drop in oil prices, which have since picked up.

The core PCE (ex food and energy) index rose 0.1% in January but slowed to a 1.8% year-over-year pace. That marks a 0.2% slowdown from the pace of December and is below the Fed’s target of 2%. We watch the core PCE closely because it is the best indicator of the direction of inflation over time. This data suggests the Fed was wise to step to the sidelines in January and March and could raise concerns about the extent of the slowdown going forward.

The only data we received for February in today’s report was a preliminary estimate of total and disposable income, before adjusting for inflation. Incomes rose 0.2% before and after adjusting for taxes, which is good but not spectacular.

Bottom Line
Today’s data confirm the forecast for a weak first quarter and some cooling in inflation. The Fed should feel validated in its decision to move to the sidelines. It will still be some time until the Fed gets the information it needs to know if the last rate hike on 2018 was a mistake or not. Government shutdowns have costs that linger.

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