December 2017 Income and Outlays

Personal income and spending each improved to end 2017, but their rates of change were different.  Americans’ pay managed to grow just 0.3 percent while outlays increased 0.5 percent.  Additionally, there was a key revision to the prior period’s tally as outlays actually increased 0.8 percent (originally 0.6 percent), but November’s income tally remained as initially reported, rising 0.3 percent.  As you’ll see later, this pattern is not good for our country’s savings rate.  Finally, inflation data in the release was relatively mellow.

Three out of the four primary categories of income improved in the December for a total after-tax gain of $48.0 billion, rising 0.3 percent.  Wages and salaries moved up by 0.46 percent.  Rental income did nearly as well, rising 0.42 percent.  Personal income receipts on assets (think interest and dividend payments) grew 0.7 percent.  Only proprietors were worse off than a month earlier as income fell 3.0 percent for nonfarm firms and held steady farmers.

Consumers took their additional take-home income and spent it…and then some.  Expenditures rose $54.2 billion or 0.4 percent.  Spending on the goods portion of the economy climbed; there was, however, a split between durable and nondurable goods.  Americans spent less on wares expected to last at least three years (falling 0.2 percent) while increasing their spending on nondurable items (improving 0.7 percent).  Services, the largest spending category, increased 0.5 percent in December. 

Uneven improvements in after-tax income and spending caused the savings rate to fall.  Declining 0.1 percentage point, the nation’s savings rate fell to 2.4 percent which is the lowest level in 13 years.  There is no telling how long this imbalance can continue, but Atlas does not believe the answer is forever. 

Finally, inflation data were relatively mild.  The personal consumption expenditures (PCE) price index edged up 0.1 percent in the period but decelerated to 1.7 percent on a year-over-year basis from 1.8 percent.  Our central bank’s favorite inflation gauge behaved somewhat similarly.  The core-PCE price index (it removes food and energy since they tend to be volatile) increased 0.2 percent in December but held steady at 1.5 percent versus a year earlier.

America’s economy continues to push ahead, but consumers may be painting the nation’s future output into a corner.  At some point, Americans are going to need to save more money.  When they do, it will put downward pressure on output.  In the meantime, the trend is up, and inflation continues to be relatively tame, so changes in monetary policy can remain measured which should help keep the economy moving ahead.