Incomes, Spending Gain in U.S. on Growing Purchasing Power

Americans saw their incomes rise in February, helping spending to rise slightly as goods and services become slightly more affordable.

Personal incomes rose 0.4% in February, the same gain that incomes saw in January. A new report by the Bureau of Economic Analysis showed a total of $61.8 billion in higher personal incomes for the month of January and a $58.6 billion increase in February.

Tax Burdens and Discretionary Consumption

Americans saw their incomes rise in February, helping spending to rise slightly as goods and services become slightly more affordable.

Personal incomes rose 0.4% in February, the same gain that incomes saw in January. A new report by the Bureau of Economic Analysis showed a total of $61.8 billion in higher personal incomes for the month of January and a $58.6 billion increase in February.

Tax Burdens and Discretionary Consumption

The rise in incomes has also resulted in a sharp rise in taxes that Americans will have to pay. The BEA noted current taxes rose $4.4 billion in February, a large rise from the $0.3 billion increase in January. This meant disposable personal income rose 0.4% in February, slightly below the 0.5% gain in January.

With more personal income gains going to the government coffers and not in the pockets of consumers, private consumption showed far lower growth than incomes did in February. Personal consumption expenditures rose 0.1% in February, or $11.8 billion. The gain was below analysts’ expectations, which had expected PCE to rise 0.2%.

The weakness in PCE is particularly worrying as it follows two months of a fall in PCE, which declined 0.2% in December and January. January’s PCE number revised downward by nearly $10 billion dollars, meaning total consumption in January fell from the previous month by $28.5 billion dollars. That was after a fall of $20.2 billion in December.

Weak Aggregate Demand

The news comes after several indicators suggested Americans were not spending more even as energy costs fell, giving them greater purchasing power to spend on discretionary items in the economy. The February data may indicate a change in trend, allowing Americans to grow their spending considerably for the remainder of 2015. If the trend gains momentum, it could also encourage the Federal Reserve to raise interest rates in 2015. Recently, Janet Yellen indicated that a rate hike may depend on rising consumption and accelerating inflation, and this report indicates neither is materializing.

The weak rise in consumption, and its growing divergence from income gains, indicates Americans continue to hesitate before spending more of their rising incomes. The divergence between income gains and spending habits confounds many historical economic models, although some suggest wage gains are a leading indicator of rising demand.

Heterodox models of the post-2009 economy present other theories about the divergence between spending and wage gains. Some attribute the shifting behavior to growing income inequality.  This appears to be constraining discretionary spending power amongst the lower income deciles while the higher deciles are growing on an absolute and relative basis. Others suggest a behavioral shift amongst Americans, who see less stability and security in the American economy after the global financial crisis and unprecedented periods of long unemployment following the crash.