Nominal income growth has accelerated from +3.7% to +4.4% YoY since August 2016, a clear positive for the economy. On the other hand, real income growth has decelerated from +2.7% to +2.3% as inflation picked up during the period. Consumer spending being nearly 70% of the economy, real income growth below 2.5% is no boost for GDP.
After tax disposable income is up 4.4% in nominal dollars and is up at a 4.1% annualized rate in the last 3 months with spending keeping pace. In all, the consumer side seems in pretty good shape with nominal income accelerating in the 4-5% range after two years of 3.8% growth. This recent acceleration is important given rising inflation rates. This is the first time this cycle that inflation is outpacing income growth.
So far, we have used personal income per the U.S. national accounts. The BLS database enables us to drill down to the weekly pay checks for private employees where the effect of recent inflation flares is much more dramatic.
Is this squeeze only a temporary (“transient”) base effect as the hopefuls argue? Let’s hope so because rising inflation would not only hurt consumption, it would trigger market angst for more serious fed tightening. If it proves to be a temporary blip, we could witness much better economic news ahead as real consumption accelerates further.
Here’s another reason to pray for just a temporary blip: debt servicing has eaten 0.5% of DPI since 2012, without any meaningful rise in interest rates. The Fed has moved twice and will move twice again this year and more in 2018…
The consumer balance sheet is not in good shape, it’s only in better shape than when it was at its very worst:
But I would not bet too much on the temporary inflation blip that Yellen and others fault on oil prices. Core and median inflation rates remain comfortably in the 2.2% and 2.5% range respectively, the latter even accelerating during the last 12 months.
Curiously, the proponents of “transient inflation” don’t talk about this other blip: we have been having a rare bout of food deflation for 18 months with food-at-home prices dropping as much as 2.3% YoY, freeing significant discretionary dollars right on time for Christmas.
In all, the consumer looks pretty good, on the surface, but fundamentals are not solid, especially if inflation, and interest rates get worse. They often get worse together…