Personal Income Rise, Spending Remains Soft

Consumers had a healthy December but kept the money to themselves. Personal income rose a solid 0.3 percent with the savings rate moving 2 tenths higher to 5.5 percent, its strongest level since December 2012. Wages & salaries, however, slowed to only plus 0.2 percent in the month but follow outsized gains of 0.5 and 0.6 percent in the prior two months. Service industries lead the pay data with manufacturing pay in contraction. Proprietors' income rose in the month along with rental income while income receipts were down on lower interest income, the latter reflecting, despite the Fed's rate hike, the downdraft in rates.

Spending, as retailers already know, was very soft, unchanged with only services showing a gain. December spending on both durable and non-durable goods fell 0.9 percent each, the former reflecting weak spending on holiday gifts and also vehicles and the latter reflecting lower hitting bills. A partial offset is a 2 tenths upward revision to November's spending to plus 0.5 percent.

Price data in the report, which are the most closely followed of any inflation readings, are mixed. The PCE core could do no better than unchanged in the month though the good news is a 1 tenth rise in the year-on-year rate to plus 1.4 percent that includes a 1 tenth upward revision to the prior month, now also at 1.4 percent. This is still a long way to the Fed's goal of 2 percent but is a step in the right direction. The overall PCE price index fell 0.1 percent but is up 0.6 percent year-on-year, with this reading showing a solid 2 tenths gain to its best level since December 2014.

Income strength is a big plus but the consumer, perhaps, needs more confidence in the outlook in order to spend. Continued strength in the labor market would give the greatest boost of all to confidence though Friday's employment report for January is expected to show substantially less strength than December.

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The core PCE price index is the Fed's central inflation reading and Econoday expectations are not looking for much of an increase, calling for a 0.1 percent gain in December. Personal income and personal spending are both expected to rise, at a respectable 0.3 percent for income but at only 0.1 percent for spending with the latter reflecting what turned out to be a flat December for holiday spending.