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Personal Income up $58 Billion in April: Personal Savings Go Deeper into Negative Territory, More Interest Rate Hikes Likely

Prof. Peter Morici - 5/28/2006

The Commerce Department reported in April personal income increased $57.9 billion or 0.5 percent, disposable personal income increased $36.4 billion or 0.4 percent, and personal consumption expenditures increased $55.0 billion or 0.6 percent. The consensus forecasts were 0.8 percent for personal income and 0.4 for personal consumption. My forecasts, published by Reuters, were 0.6 percent for both personal income and personal consumption.

The Federal Reserve closely watches the price index for personal consumption expenditures, less food and energy. This index increased 0.2 percent in April and was up 2.1 percent from April 2005. Inflation is piercing the limits of Ben Bernanke’s comfort zone.

Significantly, personal outlays exceeded disposable income by $146.8 billion in April, and the savings picture got worse. In March, personal outlays exceeded disposable income by $128.2 billion. The savings rate—personal savings as a percentage of personal disposable income—declined from minus 1.4 percent in March to minus 1.6 percent in April.

If Fed interest rate increases are slowing the economy, the effect is nowhere to been seen in consumer spending habits.

Through the balance of the second and third quarters, the cooling housing market and higher credit card interest rates should finally moderate consumer spending. More significantly for GDP growth, higher gasoline prices will take a bigger bite out of what consumers spend on other products, and higher gasoline prices will do more to push up imports than increase demand for U.S. goods and services.

Growth in non-gasoline retail sales will flag and the import bill for petroleum will push up the trade deficit. Coupled with erratic growth in capital spending and commercial construction, these will slow the economy considerably.

These personal consumption, saving and inflation data add weight to the argument that GDP growth is still strong enough and inflation is still threatening enough to cause the Fed to raise interest rates further.