Slow Wage Growth Holds Back Income in July

Slow Wage Growth Holds Back Income in July

08/30/2013 BY: MARK LIEBERMAN, FIVE STAR INSTITUTE ECONOMIST

Consumers kept their cash—and credit cards—in their wallets in July as personal spending rose just 0.1 percent, while income increased 0.2 percent, the Bureau of Economic Analysis reported Friday. Economists had expected income to grow 0.2 percent but thought spending would increase 0.3 percent.

Income growth was held back largely due to wages and salaries, which were down almost $22 billion in July from June, after increasing $34.0 billion in June. Farm income, which had fallen for three straight months reflecting struggles with weather, improved a modest $6.2 billion in July, about 8 percent of the aggregate $73.8 billion drop in April, May, and June.

The weak increase in total personal spending followed a 0.56 percent gain in June.

Personal savings remained at 4.4 percent of disposable (after-tax) income.

By the numbers, income grew $14.1 billion, while spending was up $16.3 billion. In June, income grew $38.2 billion, while spending spiked $64.0 billion, the largest month-over-month increase since February, when spending rose $75.7 billion.

The personal income report measures all sources of income except capital gains. Wages and salaries generally account for just over 50 percent of total personal income.

Government transfer payments—Social Security, Medicare, Medicare, unemployment insurance, and veterans benefits—account for about 17 percent of personal income. In the aggregate, the payments rose about $4.3 billion, or 0.18 percent, in July from June.

Most of the spending increase in July was for goods, up $19.9 billion, while spending for services fell $3.2 billion. Spending on durable goods—typically big ticket items paid with borrowed funds—fell $2.5 billion, while spending on non-durable goods rose $22.4 billion. Spending on durable goods often serve as an indicator of consumer confidence.

Consumer spending is about 70 percent of the nation’s economy, so this report for the first month of the quarter offers the first glimpse into third quarter gross domestic product. BEA Thursday reported GDP for the second quarter improved at a seasonally adjusted annual rate of 2.5 percent.

BEA also reported the personal consumption price index—which tracks spending not price as the consumer price index does—increased less than 0.1 percent in July, compared with an increase of 0.2 percent in June. Year-over-year, the index is up 1.4 percent. Excluding food and energy, the index rose 0.1 percent in July, compared with 0.2 percent in June, and is up 1.2 percent in the last year.

The PCE price index is often considered the Federal Open Market Committee’s favored inflation measure since it reflects prices paid and not just posted.

Then Fed has set a target of 2.0 percent for inflation as a trigger—along with a 6.5 percent unemployment rate—for phasing out its monetary policy designed to stimulate the economy.

 

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