U.S. Personal Income GrowsModestly; PCE Raised By "Cash-for-Clunkers"

Personal income in August continued to increase at its modest July rate. The 0.2% rise  followed a 0.2% gain which was revised from 0.1%. Consensus forecasts were for a 0.1% uptick. These weak increases wholly reflect the current recession. Year-to-year income growth fell 2.6% during the last twelve months after a 2.9% increase last year.

The dismal job market accounts for this year's negative income growth. Wages & salaries rose modestly m/m during July and August. However, these latest gains were not enough to lift wages yr-to-yr which fell 5.2% after a 2.1% 2008 increase. Wages in the factory sector fell 11.6% y/y while service sector wages fell 5.4%. To a limited extent these declines were offset by a 3.6% increase in government sector earnings.

Unemployment insurance payments picked up just some of the slack in the job market and rose 4.4% during August. That lifted payments to $136.9B versus $60.4B during August of last year. Interest income continued to show the effects of lower rates and fell 6.9% y/y while dividend income fell by one-quarter as corporate profits dried up.

Disposable personal income increased just 0.1% following a slight decline during July. Adjusted for inflation, real disposable income slipped for the third straight month, although only by 0.2% during August and by 0.1% in July. Real disposable income growth of 1.3% y/y was lifted by tax cuts earlier this year. The saving rate fell again with the weakness in income growth. The decline to 3.0% contrasted with a May peak of 5.9%. Nevertheless, the rate remained up slightly from last year and double the 2007 level.

Personal spending showed the full effect of the "cash-for-clunkers" program for new motor vehicle purchases. It lifted durables spending by 5.3% (-1.3% y/y) with a 13.3% gain (6.6% y/y) for autos. Spending on nondurables rose just 2.3% (-5.3% y/y) as outlays on apparel continued down by 3.8% versus last year. Spending on furniture continued quite weak and fell 7.7% versus last year. Outlays on services increased 0.4% (1.7% y/y) as spending on health care continued quite strong and posted a 5.2% gain versus last year. Spending in restaurants and on recreation remained negative.

Prices increased 0.3% during August reflecting an 8.4% rise (-30.5% y/y) in gasoline costs and another rise is in store for September. Nevertheless, the PCE chain price index still was down by 0.5% versus last year. Less food-and-energy, "core" prices were again quite tame and posted their fourth consecutive 0.1% increase. Goods prices rose 0.7% (-3.6% y/y while prices for services increased just 1.0% y/y.

The personal income & consumption figures are available in Haver's USECON and USNA databases.

Yesterday's speech titled Central Bank Exit Policies by Vice Chairman Donald L. Kohn can be found here.

Yes, Japan’s Tankan survey has legs and the rise in the various large company Tankan indices is ongoing. There is somewhat less vigor in the rise of the future improvement expected but it is still advancing at a solid pace and the current situation has improved more rapidly. The fly in the ointment this quarter is that despite ‘improved confidence’ the plans for capital expenditure have been cut back. In the end that casts some doubt about the rise in confidence itself. Firms with profits still under pressure are acting to conserve cash instead of aggressively re-deploying themselves for growth ahead. That kind of behavior could help to torpedo recovery even as survey respondents say that things are getting better.

The table above shows that manufacturing, wholesaling and personal services are best sectors in terms of the percentile standing of their respective indices. Even so these sectors are in the bottom 30th percentile of their respective ranges or lower. Non MFG as a whole is in the bottom 13 percentile of its range. Manufacturing’s outlook, at a raw reading of -21, is in the 41st percentile of its range. That is somewhat better, than the current assessment but still far from good.

Medium sized firms assess their MFG index as in the 23rd percentile of its ranges for small enterprises it is much worse as they stand in the bottom 7th percentile of their range. The nonMFG percentiles for the medium and small enterprises are comparable to the Tankan Large Company readings for Non MFG – very weak.

Yes Japan has made progress. But the current state of business is still poor even though it has improved. While the expected improvement is at a slightly better level than the assessment of current conditions, firms continue to react to the recession instead of planning ahead for recovery. As a result, one of the great forces of recovery has yet to be unleashed- optimism. Japan’s recovery remains cautiously guarded and in the end that will be a drag on its momentum. Until firms see the need to invest for the future and as long as they cut and hack at existing spending plans the look will remain touch and go.

Housing demand continues to improve. The National Association of Realtors (NAR) reported that during August, pending home sales increased 6.4%, notably stronger than June's 3.6% and July's 3.2% gains.  NAR's index stood at 103.8, the highest since March 2007; the index base is 2001=100.

In this report, all four regions of the country participated in the firming sales pattern.  The West led again, with a whopping 16.0% jump.  This is a  monthly rate; you can annualize it, if you like, and see a really eye-popping figure.  The sales index there was 130.5; its all-time high in the West is 133.0 in February 2005. This upturn in sales has been helped by weak house prices, but as noted elsewhere on these pages recently, these prices have started to firm; while there are no price data with this report, NAR's tally of sales closed in August showed an outright increase in prices in the West of 1.3%; since an apparent trough in April, these prices have risen a total of 8.6%. 

Elsewhere, sales advanced 8.2% in the Northeast, and at 85.3, this index is up 47.6% since the low there in January.  In the Midwest, sales gained 3.1% in August, and they are 25.1% above their low, also in January.  Sales in the South just barely edged higher, 0.8%, but they have risen more in prior months, so that they are now 27.3% above their January trough.

These home sales figures are analogous to the new home sales data from the Commerce Department in that they measure existing home sales when the sales contract is signed, not at the time the sale is closed. The series dates back to 2001.

The pending home sales data are available in Haver's PREALTOR database. The number of homes on the market and prices are in the REALTOR database.  

The headline sounded so promising: construction spending rose 0.8% in August, when forecasters had looked only for a 0.2% decrease. But the pleasure with this result was short-lived. July's amount was revised from -0.2% to -1.1% and June's from a marginal 0.1% increase to a 1.4% fall. Some parts of the economy are improving, but much of construction activity continues to lag. Total outlays in August were 11.6% below a year ago.

Nonresidential projects remain the weakest. Those outlays edged down 0.1% in August, and July was revised from -1.2% to -2.6%, while June's figure was cut back from -2.2% to -4.0%. Over these last 3 months combined, nonresidential outlays dropped by 6.5%; the weakest segments have been lodging, commercial and amusements, each down 12-15%; education (private structures), offices, transportation, manufacturing and communication, down 5-8%, and health care, power and religious construction activity have been flat to somewhat higher. However, as Tom Moeller pointed out here a month ago, these declines result mainly from poor business profits during the worst of the recession; planning and building lead-times mean that recent work reflects those discouraging business conditions from at least several months ago or more. Now profits are improving and recovery in the residential sector seems to be more firmly established. So the implications for sustained turnaround in nonresidential construction are much more positive now.

Public construction was down in August by 1.1%, as federal building activity fell 7.6%, while state and local government outlays decreased 0.5%. Increases over previous months mean that the year-on-year comparison still shows a gain, this of 3.3%.