High Personal Income Growth Solidifies Case for Rate Hike

Extremely high personal income growth throughout the United States is making the case for the Federal Reserve to raise interest rates in December.

A new study by the Bureau of Economic Analysis shows that personal incomes grew by 4.6% on average throughout 2014 in metropolitan areas, after rising only 1.1% in 2013.

Extremely high personal income growth throughout the United States is making the case for the Federal Reserve to raise interest rates in December.

A new study by the Bureau of Economic Analysis shows that personal incomes grew by 4.6% on average throughout 2014 in metropolitan areas, after rising only 1.1% in 2013.

The Local Area Personal Income report, which lags other reports on income growth by several months, is nonetheless a significant focus for the Federal Reserve in setting its monetary policy. The LAPI study accounts for variations on the county level, and tracks, which parts of the country, are seeing stronger and weaker income growth.

The worst income growth was in rural areas, which still saw a 3.2% increase in 2014 after rising 1.9% in 2013. However, several counties saw personal incomes decline sharply, with total incomes falling in depressed areas like Wallace County, Kansas, where year-over-year incomes fell 35.1% in 2014 compared to the previous year. Offsetting this was a sharp increase in other rural areas, like McPherson County, Nebraska. The wide variations are largely a result of shifting populations and demographic changes.

While some economists have warned that a persistently low labor participation rate would hinder inflation and keep wages down, the LAPI study indicates that wage growth is occurring for those in the labor market and may drive price growth for goods and services throughout the country. Already, the Consumer Price Index (CPI) showed a 2.5% year-over-year increase in October, a sharp acceleration from previous months in the year. Excluding food and energy, which are notoriously volatile, the CPI also rose 2.5%, indicating that falling oil costs may have little to do with rising prices.

FOMC View

The sharp acceleration in personal income in 2014 may encourage the Federal Reserve to begin making small increases to the Federal funds rate target.

In addition to the LAPI data, the FOMC noted that other indicators of income gains suggest a strengthening labor market. “Real disposable income grew at a solid pace in July and August. Recent gains in home values and the net increase in equity prices over the intermeeting period boosted household net worth. Moreover, consumer sentiment in the University of Michigan survey of consumers improved in early October,” the FOMC, said in a statement.

However, the FOMC also acknowledged that housing remains uneven and that government spending has weakened, which could cause some drag on the larger economy.

The Federal Reserve also noted that some indicators of inflation are lagging indicators of wage growth. “Average hourly earnings for all employees increased 2-1/4 percent over the 12 months ending in September, a pace that was faster than consumer price inflation,” the FOMC said.