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Personal Income up $49.3 Billion in October - Savings Rate Improves, Good News for Stocks

Prof. Peter Morici - 12/6/2006

Last week, the Commerce Department reported in October personal income increased $49.3 billion or 0.4 percent, disposable personal income increased $33.1 billion or 0.3 percent, and personal consumption expenditures increased $16.9 billion or 0.2 percent.

The price index for personal consumption expenditures, including food and energy, fell 0.2 percent in October, and was up 1.5 percent from October 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 October, as it did in September. In October, the index was up 2.4 percent from October 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 0.2 percent in October, and has increased 2.1 percent since October 2.1

Inflation remains stubbornly above the Federal Reserve target range of 1 to 2 percent, despite flagging growth in the second and third quarters. The Federal Reserve is not likely to risk additional inflation to shore up the economy by lowering interest rates

Chairman Ben Bernanke will want to make sure inflation is safely boxed before stimulating the economy, even if that risks a recession.

Also, the savings picture improved. Although consumers continued to spend more than they earn, the gap narrowed for the third month in a row. The saving rate—personal savings as a percentage of personal disposable income—was minus 1.7, 1.3, 0.7 and 0.6 percent in July, August, September, and October.

With housing prices falling and household wealth shrinking, savings should continue to improve. Home purchases are no longer viewed as a favorable short-term speculative investment, and individuals are likely to spend less on new homes and invest more in the stock market.

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