- by New Deal democrat
There were two important points in this morning’s personal income and spending report for January. The first is that there appears to be some unresolved seasonality at work. The second is that nevertheless both were weaker than one year ago.
Nominally personal income rose 0.9%, while spending declined -0.2%. Since the deflator increased 0.3%, real income rose 0.6%, and real spending declined -0.4%. Income was a new record high, while spending obviously pulled back:
But a look at the monthly comparisons for the last several years shows that the sharpest increase in real income all last year was also in January, up 0.9%, and the sharpest decrease in real spending was also in last January, down -0.3%:
This strongly hints at unresolved seasonality.
On a YoY basis, the chain type price deflator (blue) was up 2.5%, average for the past six months. Indeed (not shown) since last April prices are up 1.5% for a 2.1% annualized rate over the past nine months. Decomposing the price deflator shows that for goods the index rose a sharp 0.5% for the month, while for services it rose 0.3%. On a YoY basis, the index for services (gold) rose 3.4%, the lowest such increase since March 2021, while for goods (red) it rose 0.6%, the biggest increase since September 2023:
This points to the end of the deflationary period in commodities as being the underlying reason why the PCE inflation index has not declined further since early 2024. While I won’t bother with the graph this month, despite the decrease in YoY inflation in services consumption, the number is high compared with the 30 years before the pandemic. As I wrote last month, it is noteworthy that goods inflation increasing, and services inflation remaining elevated, is a typical late cycle configuration.
More evidence for residual seasonality was that the personal saving rate jumped from 3.5% to 4.6% on a month over month basis. As the graph below shows, the very same jump happened in January of last year:
Ordinarily I would consider such a jump as a potential precursor to recession, showing an increase in consumer caution, but compared with last January’s rate of 5.5%, the suggestion is that the real trend is a continued slow decline in saving - again, a typical late cycle phenomenon. In other words, as expansions continue, consumers get further out over their skis, and so more vulnerable to an adverse shock.
Some good news was that real income less government transfers, one of the metrics that the NBER looks at to determine economic expansions vs. recessions, increased by 0.3% in January to another new high:
Finally, the PCE price index is used to calculate real manufacturing and trade sales (with a one month lag), another metric used by the NBER to determine if the economy is in recession or not. These jumped 0.7% in December, continuing their post-pandemic uptrend:
Because of the apparent unresolved seasonality in the January numbers, I think we have to turn to the YoY trends for more insight this month. These show continued but decelerating growth in both income and spending, as well as a likely continuing ebbing of the saving rate. Prices of goods are firming and picking up, while services remain elevated. This continues to be a typical late cycle type of configuration.
