Takeaway: Spending outpaced Income as the decline in Saving supported services and nondurables consumption. Gov't sourced income inflecting positively


SPENDING:  Spending grew at a premium to incomes for a third consecutive month as the savings rate fell -40bps sequentially to 3.9%, the lowest level in a year.  


With the savings rate now back to the low end of the historical range, the capacity for Incremental savings depletion to support further improvements in consumption growth appears largely constrained. 


Household expenditure growth on Services and NonDurables accelerated, while spending on Durables – the 2013 leader as sales on higher ticket items improved – decelerated 300bps and 120bps on a 1Y and 2Y basis, respectively.  Whether the nascent deceleration in Durables represents a pull-back in spending across the higher income brackets remains TBD.    


INCOME:  Personal income growth, Disposable Personal Income (DPI) Growth, and Real DPI per capita all decelerated on both a 1Y and 2Y basis. 


Note that the December comp dynamics were impacted by the conspicuous pull-forward in compensation that occurred at year-end last year ahead of the fiscal cliff resolution and impending tax law changes.  Given the comp distortion, the 2Y comp offers the cleanest read for December and on that basis growth decelerated a moderate 20bps sequentially from +3.8% to +3.6% (vs. the reported -0.8% on a YoY basis).


Salaries & Wages:  Private sector salaries & wages slowed modestly in December while the slope of the broader trend remains positive at ~5% YoY on a 2Y basis.   


The other notable dynamic is that government sourced salary and wage income is inflecting positive for the first time in years. 


State & local government employment was positive for the 5th consecutive month in December (after 4 years of negative growth) and the ebbing of the fiscal drag alongside the spending friendly budget deal has aggregate incomes for government workers - which represent ~17% of labor force and ~17% of aggregate wage/salary income – beginning to show some positive mojo.


INFLATION:  PCE and Core PCE inflation both a little firmer sequentially, but still well below target.   The longer we mark time sub-target the more worrying it becomes for policy makers.  Expect speculation around an “inflation floor” to pick up as the Yellen transition matures.







CONFIDENCE:  This morning’s final estimate of confidence from the Univ. of Michigan capped the January data on consumer sentiment.  Across the primary survey’s, the results were mixed on a Mom basis with the Conference Board estimate advancing 3.2 pts while the Univ. of Michigan and Bloomberg readings declined a modest 1.3 and 1.1 points, respectively. 


The middling confidence numbers make sense in the context of the quantitative setup for the $USD and the TTM relationship between sentiment and the currency.  The dollar is currently neutral on a TRADE basis from a quant perspective and searching for some direction as it flirts with a breakout above the 81.12 TREND line.







Christian B. Drake



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