US: Income growth recovering, consumption should follow - Wells Fargo

Spending was weak, up 0.2 percent in nominal terms and down 0.1 percent in real terms, however, income was strong, up 0.4 percent, while disposable personal income surged 0.9 percent in nominal terms, 0.6 in real terms, noted analysts at Wells Fargo. According to them while consumption may be weak in the first quarter of the year, they expect a recovery in the pace of consumption for the rest of the quarters.

Key Quotes: 

“The increase in income was not only due to tax reform and social security payments. Wages and salaries increased $45.2 billion in the month at an annual rate, versus an increase of $37.3 billion in December. That is, wages and salaries remained strong, which helped catapult disposable personal income higher due to the lower withholdings and higher social security transfers.”

“Now that income growth is on the right track, it is clear that the probability for consumption growth to recover in the next several months increases. This probability increases further after the release of consumer confidence, which hit a new cycle high in February, up to 130.8.

“Personal consumption expenditures were up only $31.2 billion after a $53.1 billion increase in December and a $92 billion increase in November, all at annual rates. The weakest sector of spending in January was the consumption of durable goods, which registered a decline of $23.2 billion, while nondurable goods consumption increased $28.0 billion.”

“Although consumption started the year on a weak note compared to the rates seen during the last quarter of 2017, the good news on the income side and the confidence side will keep Americans engaged in the economy. While consumption may be weak in the first quarter of the year we expect a recovery in the pace of consumption for the rest of the quarters.”