Economy

Mixed View on Personal Income & Spending vs. Rate Hike Expectations

Jon C. Ogg

Published: November 25, 2015 10:44 am

Last Updated: January 13, 2020 4:46 pm

If you read all the reports about weak retail spending, you might wonder how all those dollars saved on gasoline are ending up in the economy. Now add in continually strong jobs reports. The Bureau of Economic Analysis reported that Personal Income rose 0.4% and Consumer Spending rose by 0.1% in the month of October.

Bloomberg had the estimates at 0.4% on Personal Income, but they were looking for a 0.3% gain in Consumer Spending.

The PCE price index rose by 0.1% rather than the 0.2% expected, while the core PCE price index was flat instead of the 0.2% that had been expected by Bloomberg. These are two of the most important readings used by the Federal Reserve, and even the 1.3% annualized increase in the Core PCE price index is short of the Fed’s target.

As a reminder, the Fed wants inflation up in the 2.0% to 2.5% range. This is also ahead of next month’s key decision on whether or not the Federal Reserve’s FOMC will raise Fed Funds for the first time this decade.

In income’s 0.4% gain, wages and salaries rose 0.6%. A key issue here is that the Savings Rate rose 0.3 points to 5.6%.

Fuel prices remaining lower are contributing to flat price index readings. That cannot last forever, but we just have yet to see how that is translating into significantly higher dollars being spent on consumer goods.

The formal BEA report said:

Personal income increased $68.1 billion, or 0.4 percent, and disposable personal income (DPI) increased $56.8 billion, or 0.4 percent, in October, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $15.2 billion, or 0.1 percent.  In September, personal income increased $27.4 billion, or 0.2 percent, DPI increased $27.0 billion, or 0.2 percent, and PCE increased $9.5 billion, or 0.1 percent, based on revised estimates.

Real DPI increased 0.4 percent in October, compared with an increase of 0.3 percent in September. Real PCE increased 0.1 percent in October, the same increase as in September.

If this report was being published inside a financial vacuum it might not give much hope to the case for a Federal Reserve rate hike next month. Outside of that vacuum, we have seen a whole host of Fed speeches and warnings that the first rate hike in years is probably coming in December. If not then, almost immediately after.