Home >> United States & Canada >> Economics & Trade

     Email   Print 

Personal Income up $53.3 Billion in September

Prof. Peter Morici - 10/30/2006

Today, the Commerce Department reported in September personal income increased $53.0 billion or 0.5 percent, disposable personal income increased $49.3 billion or 0.5 percent, and personal consumption expenditures increased $11.6 billion or 0.1 percent.

The price index for personal consumption expenditures, including food and energy, fell 0.3 percent in September, and was up 2.0 percent from September 2005.

The Federal Reserve closely watches the price index for personal consumption expenditures, less food and energy. This core price index increased 0.2 percent in September, as compared to 0.3 percent in August. In September, the index was up 2.4 percent from September 2005.

As important to the Federal Reserve, the market based core inflation index, which excludes food, energy and imputed prices like rent on owner occupied homes, increased a scant 0.1 percent in September. This was better than in most previous months, but one month is not a trend.

Outlook for Federal Reserve Policy

Slower growth and stubborn inflation leave Ben Bernanke with tough choices. Moderating oil prices and slower growth will temper inflationary pressures but that process may take another month or so to work through the supply chain. Pressures within the Federal Reserve may mount to further increase interest rates, but more tightening would affect commodity and labor markets with too much lag and only risk turning the slowdown into a recession.

The principal effects of Fed tightening are felt in the housing and auto sectors, and those industries are already on the ropes. Higher interest rates would only serve to create liquidity problems for some home builders, the Ford Motor Company and some auto suppliers.

Ben Bernanke must now grapple the potential for the housing market to panic in many cities where realtor optimism and aggressive appraisals cultivated irrational pricing, like parts of San Diego, Washington and New York, and where tough structural adjustments besiege local economics, like Detroit.

Inflationary pressures will take a few more months to work out but lower interest rates will take many months to appreciably affect consumer and business behavior.

To stabilize the economy and minimize the risk of recession, Ben Bernanke may have to risk lowering interest rates sooner than conservative elements within the Federal Reserve and financial community would recommend.

Business cycles have shortened and external forces, such as oil prices and China’s exchange rate policy, are now as important for the globalized U.S. economy as Federal Reserve policy. Steering the economy to safety requires deft, anticipatory maneuvers—the work of a grand prix driver not a cruise ship captain. Such risk taking may not win the approval of hawks in the Federal Reserve, the financial community and academic economists; however, the Federal Reserve raised interest rates too much the first half of this year and may now have to take risks to keep the recovery going.

Household Savings, Housing and the Stock Market

The savings picture continued to improve. Although consumers continued to spend more than they earn, the gap narrowed for the second month in a row. The saving rate—personal savings as a percentage of personal disposable income—was minus 0.8, 0.5 and 0.2 percent in July, August and September.

With housing prices falling and household wealth shrinking, savings should continue to improve. Home purchases will be viewed as less of a near-term speculative investment, and individuals will be more likely to spend less on new homes and invest more in the stock market.

Going forward, lower gasoline prices leave households with more disposable income. Consumers can spend more on other consumer items and save more too. Much of those savings will find their way into the stock market.

Overall, falling housing prices and more savings should help the stock market rally continue.