We got the river card on 4Q Consumption in Friday’s GDP report but there are a few notables in the underlying Income & Spending data for December released this morning:
- Income ↑ …. Aggregate Private Sector Salary and Wage Growth accelerated to +5.2% Y/Y, marking the fastest pace of growth since November 2015. Recall, the income and consumption data in 4Q16 was revised sharply lower (and probably understates the underlying reality) so the comp was exceeding easy, but the 2Y comp continues to accelerate as well --> signaling that the year-over-year acceleration wasn’t singularly base effect driven.
- Savings Rate ↓ …. The Savings Rate plumbed new cycle lows at 2.4% in December. The decline in the Savings Rate over the past year has been a notable support to consumption growth alongside flattish aggregate income growth. The Savings Rate has been falling ~80-100 bps year-over-year and unless we continue to plumb new lows (pushing towards new all-time lows), the tailwind to consumption growth will progressively recede.
- Confidence ↑,Savings ↓: Rising Confidence and Consumption alongside a declining savings rate are hallmarks of late-cycle expansion. The notable decline in the savings rate can be viewed from two perspective. First, it could be an attempt by consumers to maintain consumption in the face of a relative rise in costs. Or, second, it could reflect improved optimism around forward prospects. Those two factors aren’t (necessarily) mutually exclusive but both the hard and soft data argue in favor of the latter at present.
- Transitory …. Month 68 | Core PCE inflation has now held below target for 68 consecutive months. While recurrent bouts of energy/commodities inflation/disinflation have pushed the Headline readings around, continued weakness in core goods pricing and, more recently, the crest and roll in Shelter Inflation (~32% weighting in the CPI basket) have stymied the advance in core pricing growth. Solid growth and non-urgent remain, of course, the #Goldilocks dynamic.
- (Still) Long The Rich …. If you own assets, you like asset price inflation and all-time highs in equities. Given the sensitivity of high ticket discretionary consumption to asset market volatility, you like daily ATH’s + peak Sharpe Ratio’s even more. As we’ve highlighted, confidence and consumption trends at the high end are more than a cutesy talking point as the top quintile of households (by income) account for ~40% of consumer spending. Luxury goods consumption was up +8.8% Y/Y in December and closed full year 2017 +8.3% Y/Y, marking the best year of luxury consumption growth of the cycle.
Some Other Quick Thoughts:
The 2018 Bridge? …… 18 States increase minimum wages in 2018, Tax withholding changes will take place sometime in February and distribution of widely announced, tax-reform related bonuses will follow as well.
These development are particularly relevant now because:
- Payroll growth will continue to slow and without progressive wage inflation, aggregate income growth will remain largely flat-lined. With the savings rate likely to trough, flattish income growth caps any large scale upside to acceleration in consumption growth (absent further credit acceleration). With wage growth running ~+2.5% Y/Y, even a 1% increase in after-tax income – in demographics with high marginal propensities to consume – isn’t inconsequential. A mini-step function increase in aggregate private sector wage growth/DPI will help buoy the rate-of-change data over the NTM and …..
- Bridging the Gap: The notion of a re-imagined Phillips Curve that re-emerges more conspicuously as unemployment breaches some critical, ultra-low threshold has been pretty well advertised and with some empirical underpinning (see, for example: WSJ). If tax law changes buy the economy some rate-of-income growth buffer while the labor market continues to tighten over the next year, there exists a higher probability that organic wage inflation really begins to percolate and could take the hand-off from tax related gains in income growth in 2018.
