Disposable personal income (DPI) in December surged by 2.7% compared
with November's level, although the gain "was boosted by accelerated and
special dividend payments to persons and by accelerated bonus payments
and other irregular pay in private wages and salaries in anticipation of
changes in individual income tax rates," the government advises. By contrast, personal consumption expenditures increased a modest 0.2% last month, or about half the rate in November.
The temporary special payments that dramatically raised the growth
rate of DPI last month makes it difficult to analyze the data as it
relates to the business cycle. We'll know more in a month on this front
when the data normalizes. As for personal consumption, the December gain
was sluggish, but the increase marks the 9th rise in 2012 vs. three
monthly declines for PCE last year.
Looking at the year-over-year changes for DPI and PCE shows continued
growth. The sharp annual increase for DPI at 2012's close is suspect,
due to the special payments last month. PCE, meanwhile, advanced 3.6%
for the year through December, or roughly in line with the annual pace
in recent months. Consumer spending, in short, continues to grow but at
an unspectacular rate.
RBS economist Guy Berger notes
"a fair amount of resilience in demand" in the consumer sector. "But,
this quarter doesn't look great for spending as there will be some
intense headwinds."
For now, the income and spending numbers continue to support the case
for expecting modest growth. The question is how far last month's
unusually strong DPI will retreat back to a "normal" range in the
January report? As for the implications on spending, the optimistic
outlook is that the large injection of income into households last month
will smooth over some of the rough edges when it comes to consumption
in this year's first quarter.
Maybe, but this is no time for blind optimism. The potential for
across-the-board spending cuts in federal spending in March lurks just
around the corner unless Congress intervenes. "The biggest threat to the
recovery now appears to be Washington," the Washington Post reminds.
That's a warning that resonates strongly after
yesterday's unexpected drop
in fourth-quarter GDP, due largely to an unusually steep drop in
defense spending. Yes, the business cycle seems to be heavily dependent
on government largess at the moment. Is this something new? Or has the
dependency been there all along, and we simply overlooked this fact in a
period when spending more was assumed to be locked in stone? But that's
an assumption, as we learned yesterday, that's in immediate need of an
attitude adjustment.