US personal income rose 0.3% m/m in November

Personal income rose 0.3% m/m in November, in line with the expectations and one-tenth above consensus estimates, driven by a solid 0.5% rise in wage and salary income. Wage and salary income is now up 4.5% y/y, supporting a 4.4% y/y increase in compensation. Personal spending, which was inadvertently released late yesterday afternoon by the BLS, rose by a solid 0.3% in nominal terms. After adjusting for inflation, real spending was also up 0.3%. 

However, nominal personal spending for October and September was revised lower by one-tenth to 0.0% and 0.2%, respectively. As a result, the saving rate remained elevated at 5.5% in November, up from 5.0% at mid-year, as reported spending has not fully kept up with growth in nominal income. The November report on personal income and spending includes revisions to the Q3 data released yesterday, which showed real personal consumption rising by 3.0% q/q saar.

The rise in the saving rate is likely to rekindle concerns that households have a greater propensity to save and, as a result, lead some to question the durability of domestic demand in the face of a Fed tightening cycle. The rise in the saving rate is unlikely to persist and, over time, the solid growth in personal income is likely to keep growth in personal consumption expenditures elevated at this point of the cycle. Thus, while households are displaying a level of caution, perhaps in response to a combination of lingering concerns about global growth and rising geopolitical risk, the bulk of the data continue to support the view that the trajectory of economic activity will remain above the growth rate of potential output in coming quarters. 

Household spending may also be reflecting the warmer weather across much of the country, with personal consumption of electricity and gas down 6.8% in October and a further 1.3% in November. Lower heating and utility costs from persistent warm weather are expected to eventually support non-utility consumption.

The inflation side of this morning's report was broadly in line with consensus expectations. The flat reading on headline PCE was one-tenth lower than the expectation. At the core PCE level, prices rose by 0.1% m/m (0.114% rounded to three decimals) and 1.3% y/y. Both numbers were in line with the expectation. In the November PCE report, goods prices were down 2.6% y/y with both durables (-1.7% y/y) and nondurables (-3.1% y/y) showing weakness. Services inflation at 1.9% y/y was steady relative to prior months, but insufficient to offset further weakness in core goods. The pace of decline in goods prices has slowed somewhat, consistent with the expectation that the pass-through effects of past dollar appreciation in 2014 are starting to wane. 

"We expect renewed dollar pass-through effects based on the rise in the dollar since mid-2015 and our forecast also assumes the sharp declines in Chinese producer prices continue to put downward pressure on goods prices. Hence, we expect y/y rates of core PCE to be near current levels for most of 2016, which should reinforce expectations of a gradual Fed tightening cycle", says Barclays.