February 25, 2022 | 09:09
Solid Wages & Salaries Boost Spending
Always focus on wages & salaries. Always always always. That is the key factor behind consumer spending. Clearly the end of the supplementary child tax credit is a negative, but remember that wages & salaries account for about 50% of total personal income so what happens there matters. And having a steady paycheck counts. With a tight labor market, employers are paying more to bring workers on board, and that is good news for those on the receiving end. Wages & salaries grew for the 11th consecutive month, and though January's 0.5% gain was less than the 0.9% average over that time span, it is still a decent increase.
So, despite a flat reading for overall personal income, it was enough to boost spending a solid 2.1%, the biggest increase since March 2021, though the saving rate dropped 1.8 ppts to 6.4%. Yes, much of that was from higher prices, but even in real-terms, spending was up 1.5%, fully recovering from the declines over the prior two months. In other words, good start to 2022!
So what was being bought? It was spread out between durables (+8.5%), nondurables (+1.9%) and services (+0.1%). One area, however, didn't benefit. Despite more 'relaxed' views on Omicron, or perhaps the phrase "we're learning to live with it" should be used, people are still not dining out as often. Restaurants/bars fell for the first time in three months although lack of staff may also be a deterrent. But other items, such as cars (+12.9%), furniture (+6.4%), recreational goods & vehicles (+7.6%), and clothing (+4.5%), were all higher. Some of these categories gives me hope that some of the products that were/are/whatever in short supply are coming back online. Here's hoping!
Overall, this is good news. But the Federal Reserve is focussed on something else.... the deflator. No surprise there: the core PCE deflator rose 0.5%, the 4th straight month of that magnitude, lifting the y/y rate to 5.2%, the highest since April 1983, or when Michael Jackson's Billie Jean was topping the charts. And that is another good reason for the first hike to kick things off on March 16.
Bottom Line: Never underestimate the American consumer.