Will Higher Personal Income Turn Consumer Sentiment Around?

Plant Money

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Personal income in the United States (money earned from wages and salaries) increased by 0.5 percent in September, according to the Bureau of Economic Analysis and the Commerce Department. Disposable personal income (what’s left after taxes) also increased 0.5 percent. August’s data were upwardly revised from a gain of 0.4 percent to 0.5 percent.

The news is good. Economists were expecting a more modest increase in personal income of just 0.3 percent, and the better-than-expected results suggest that consumers could open up their wallets this holiday season despite melancholy readings from sentiment indexes and low overall economic confidence.

The Thomson Reuters/University of Michigan consumer sentiment index fell to 72 in November, according to a preliminary reading, undermining economist forecasts for an increase to 75 (the index read 73.2 in October). Gallup reported that its index of economic confidence sank to -35 in October, its lowest reading since the debt ceiling standoff in 2011.

All told, the sentiment and confidence data paint a picture of a wary consumer — the kind who wouldn’t necessarily be quick to spring for a big purchase come this holiday season because of personal financial and general economic concerns.

But still, nothing motives someone to make a purchase more than money in the bank, though that phrase may be an overly optimistic way to present the September personal income data.

A 0.5 percent increase in disposable income for the month is good, yes, but it is a small tailwind participating in a hurricane of headwinds. The report shows that while income increased in September, spending continued to decelerate. Consumer spending increased 0.2 percent on the month, as expected, a slower growth rate than the 0.3 percent registered in August.

Inflation — as measured by the core personal consumption expenditures price index — remained soft, increasing just 0.1 percent on the month and 1.2 percent on the year. This indicates a level of inflation that is still well below the Federal Reserve’s 2 percent long-term target rate.

At the end of October, the U.S. Bureau of Labor Statistics reported that its seasonally adjusted Consumer Price Index for All Urban Consumers, or CPI-U, increased by 0.2 percent in September. This was in line with economist expectations and consistent with the generally soft price pressures experienced over the past several months. Headline consumer prices are up 1.2 percent on the year.

Investors have recently kept inflation data in their periphery because of the Fed’s aggressive stimulus program. Quantitative easing — the name given to the Fed’s ongoing purchases of agency mortgage-backed securities and longer-term Treasury securities — has four primary effects on the economy: higher inflation expectations, currency depreciation, higher equity valuations, and lower real interest rates.

Most of these effects have manifested in the U.S. to some degree, but inflation data released over the past few months have come in surprisingly soft.

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