Personal Income Sees Small Increase

Personal income demonstrates small gains just as the Federal Reserve hunts for hints of rising inflation to justify increasing interest rates.  According to the Bureau of Economic Analysis, personal incomes rose $68.1 billion, or 0.4%, indicating that workers have earned increased total wages and incomes throughout the United States, although the numbers have risen at a modest rate.

Personal income demonstrates small gains just as the Federal Reserve hunts for hints of rising inflation to justify increasing interest rates.  According to the Bureau of Economic Analysis, personal incomes rose $68.1 billion, or 0.4%, indicating that workers have earned increased total wages and incomes throughout the United States, although the numbers have risen at a modest rate.

That rate of change illustrates acceleration from the 0.2 percent increase in September, but falls in line with the rate of change throughout the summer of 2015, indicating little hint of a strong acceleration in wage growth.

At the same time, personal consumption remains depressed, rising only 0.1 percent in October. The disparity between income gains and consumption gains indicates that Americans remain less focused on spending their income on goods and services, focusing instead on saving and debt reduction.

The rapidly decelerating GDP growth rate reflects this lack of demand for goods and services. The GDP growth rate rose only 2.1 percent in the third quarter of 2015, after rising 3.9% in the second quarter.

Gains Still Gains

One investment bank note released after the BEA announced the change suggested that financial authorities should consider this further justification for an increase in the Federal Funds rate target, which analysts expect to see a small bump in December.

The Federal Reserve, according to the note, watches for continued gains in PCE as a primary indicator of future inflation. While the headline CPI remains an important indicator, analysts believe that Federal Reserve Chairperson Janet Yellen has made it clear that PCE growth will remain a primary focus in making their rate-hike decision. With continued growth in PCE, the argument for rising interest rates remains intact.

At the same time, economists warn that a deceleration in PCE may indicate that Americans have less disposable income because of decades of high debt loads, more restrictive bankruptcy regulations, and a lack of real wage growth. With nominal wages lower than their peak in 2008, Americans find it increasingly difficult to pay their debts and meet other financial obligations. Thus the anemic growth in PCE, which has fallen from 0.3% in June of this year to 0.1% in September and October, may represent the beginning of a further downward trend.

Less Disposable Income Growth

Disposable personal income (DPI), an often-ignored indicator of income growth and macroeconomic strength, shows continued weakness, according to the BEA. DPI rose 0.4 percent in October. While that represents a slight increase from 0.3 percent in September, it remains too low to inspire increases in the purchase of goods and services. The BEA reported that non-durable goods purchases rose 0.1 percent in October, after falling 0.2 percent in September. Purchases of services rose less than 0.1 percent in October after rising 0.2 percent in September.

The aggregate decline in spending on goods and weak spending on services over the last two months, despite continued positive gains in PCE, suggests that companies will continue to struggle to sell goods and services and total economic activity in the U.S. may remain weak.

Despite these indicators, pressure on the Federal Reserve to raise interest rates has remained steady, and more analysts are predicting a rate hike at next month’s Federal Open Market Committee meeting.