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Economy in Brief

Lower Prices Raise Real Income
by Tom Moeller December 24, 2008

Consumers further retrenched last month as spending was cut in a successful attempt to raise savings. Personal consumption expenditures fell 0.6% during November after an unrevised 1.0% October decline. The latest was the fifth consecutive monthly drop which pulled the y/y rise to a barely positive 0.5%, the weakest since 1961.

So far in 4Q, spending is down at a 6.2% annual rate from 3Q, but the drop in gasoline prices is helping to lift real spending. It gained 0.6% during November and that was the first rise since May. So far in 4Q, real spending is down at a 2.2% annual rate from 3Q. That compares to a 3.8% decline during 3Q. During the last three months together, real spending on motor vehicles fell at a 50.3% annual rate. Furniture spending rose at a 3.7% rate due to price deflation stimulating sales. Lower prices only somewhat helped spending on clothing. Real spending here fell at a 0.8% rate during the last three months, following their summer collapse, while nominal spending continued to fall sharply at a 5.0% rate during those three months.

Lower gasoline prices have fueled more driving. Since a year ago gasoline prices have halved and they're down at an 86% annual rate during the last three months. As a result, nominal spending on gasoline & oil is down at an 81% annual rate during the last three months. But real spending is up at a 40% rate. The level of real spending on gasoline is near its historic high.

Disposable personal income fell 0.1% last month following a downwardly revised 0.2% October increase. Again, lower prices have bolstered real income. Adjusted for inflation disposable income rose 1.0% after a 0.7% October increase. That raised the level of real take home income pay by 1.6% versus a year ago and by 3.5% so far in 4Q versus 3Q.

Overall, personal income fell 0.2% last month versus expectations for no change. October's income gain was revised down. Wage & salary income slipped 0.1% and that reversed an unrevised 0.1% uptick during October. The y/y gain of 1.5% compares to a 5.6% rise last year. Factory sector wages fell for the fourth straight month (-2.4% y/y) and wages & salaries in the private service-providing industries slipped 0.1%. The 1.4% y/y rise compares to 6% or greater growth from 2004 to 2007. Wages in the government sector rose 0.3% and year-to-year growth of 5.5% has been steady.

Reduced spending combined with modest income growth raised the personal savings rate to 2.8%. So far this year, the savings rate has averaged 1.5%, the highest since 2004.

The PCE chain price index fell 1.1% and the index was slightly below its May level. Lower gasoline prices, off 28.5% (-27.9% y/y), again offset the rise in food prices which rose 0.3% (6.2% y/y). The core PCE price index fell slightly for the second month and the decline matched Consensus expectations. Three-month growth of 0.5% was the lowest since 2001. Furniture prices fell yet again (-3.6% y/y) while apparel prices fell 0.3% y/y. Transportation costs continued firm and rose 5.4% y/y while medical care prices rose 2.0% y/y.

The figures noted above are available in the Haver USECON and in the USNA databases.

Disposition of Personal Income (%) November October Y/Y 2007 2006 2005
Personal Income -0.2 0.1 2.5 6.1 7.1 5.6
  Disposable Personal Income -0.1 0.2 3.0 5.5 6.4 4.4
Personal Consumption -0.6 -1.0 0.5 5.5 5.9 6.2
Saving Rate 2.8 2.4 0.1 (Nov. '07) 0.5 0.7 0.3
PCE Chain Price Index -1.1 -0.5 1.4 2.6 2.8 2.9
  Less food & energy -0.0 -0.0 1.9 2.2 2.3 2.1
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