Personal Income Increased 0.4% in July
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Implications: Incomes and spending continued to move higher in July, led by the fastest growth in wages & salaries so far this year. Payrolls are up almost three million from a year ago, helping push private-sector wages & salaries up a robust 4.6% in the past year. Total income – which also includes rents, small business income, dividends, interest, and government transfer payments – increased 0.4% in July and is up 4.3% in the past year, faster than the 3.5% gain in consumer spending. In other words, consumers have enough income growth to keep lifting their spending without getting into financial trouble. One part of the report we keep a close eye on is government redistribution. In the past year, government transfers to persons are up 5.1%, largely driven by Obamacare. However, outside Medicaid, government transfers are up a slower 4.2% in the past year and unemployment compensation is hovering around the lowest levels since 2007. The bad news is that overall government transfer payments – Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment comp – aren't falling back to where they were before the Panic of 2008, when they were roughly 14% of income. In early 2010, they peaked at 18%. Now they're down to around 17%, but not falling any further. Redistribution hurts growth because it shifts resources away from productive ventures. This is why we have a Plow Horse economy instead of a Race Horse economy. The PCE deflator, the Fed's favorite measure of inflation, increased 0.1% in July. Although it's only up 0.3% from a year ago, it continues to be held down by falling energy prices. Nevertheless, in the past three months, the PCE deflator is up at a 2.5% annual rate. The "core" PCE deflator, which excludes food and energy, is up 1.2% from a year ago. That's still below the Fed's 2% inflation target, but it's up a faster 1.7% annualized rate in the past six months. As soon as energy prices stop falling, inflation is going to pick up, supporting the case for starting rate hikes in September.

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Posted on Friday, August 28, 2015 @ 9:42 AM

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