Disposable Income And Consumer Spending Increase Yet Again

Looking for some positive economic news? Well, we have some. According to recent reports from the Bureau of Economic Analysis, personal consumption is up for the sixth consecutive month. Before you snicker at that, with your thoughts about American's turning back to their credit cards, it should also be noted that disposable income also rose for the third consecutive month. James Picerno from The Capital Spectator goes into further detail on the subject in his blog post below.

Disposable personal income (DPI) and personal consumption expenditures (PCE) increased in December, the Bureau of Economic Analysis reports. The update marks the sixth straight monthly rise in PCE and the third consecutive gain for DPI. In other words, if you’re looking for a reason to doubt the revival in consumer spending of late, you won't find it here.

Consumption’s 0.7% jump in December (the second-highest monthly gain in 2010) was largely driven by an acceleration in the purchases of goods rather than services. Goods-related PCE rose 1.2% in December, up from November’s 0.3% gain. Services-related PCE increased by a relatively spare 0.3% last month, about the same as November’s pace. Does the faster pace in goods-related purchases reflect growing consumer confidence? Or is it simply a temporary change bound up with the end-of-the-year holiday shopping?

One reason for thinking that sentiment may be improving for more than seasonal reasons can be found in the rise of private wages, which advanced 0.3% in December, up from November’s 0.1% rise. On an annual basis, private industry wage/salaries continue to increase at a 4% rate, the fastest in three years. That’s still well below the 6%-8% pace set back in 2005-2007, but apparently it’s high enough to keep consumer spending forging ahead.

Another sign that higher consumer spending is more than a glitch is the ongoing drop in the personal savings rate, measured as a percentage of DPI. Last month, the savings rate fell to 5.3% from 5.5% in November. In fact, the rate’s been dipping for most of the last six months. In June, the savings rate was 6.3%.

Still, the holiday factor can’t be ruled out just yet. As Bloomberg reports, “Retailers’ 2010 holiday sales jumped 5.5% for the best performance in five years, according to MasterCard Advisors’ SpendingPulse.” Impressive, but it's debatable if the holiday gains will endure or evaporate in January and beyond. It's tempting to assume that the good news will travel, but it's hard to take anything for granted when the labor market's rebound remains sluggish.

The outlook for the January payrolls report (scheduled for release on Friday, Feb. 4) calls for more of the same. Private non-farm job creation is expected to rise by a net 163,000 in the government’s update, based on the consensus forecast of economists via Briefing.com. That would be an improvement over December’s meek 113,000 advance, but we’re still a long way from a strong recovery in job creation. Until and if that changes, one can only wonder if the rebound in wages, which is essential for elevating consumer spending, can hold its ground.

This post was republished with permission from The Capital Spectator.