Healthier Balance Sheets at Home
By Michael Englund
Personal income posted a solid 0.7% increase in April, alongside a 0.6% gain in personal consumption. The chain price index, a broad inflation measure at the consumer level, rose 0.4% overall -- 0.1% excluding food and energy. On a year-over-year basis, the overall inflation gauge accelerated to a 2.7% pace, from 2.4% in March, while the core slowed to 1.6%, from 1.7%.
Meanwhile, the April market-based personal consumption expenditures (PCE) chain price index, a new inflation indicator that's closely watched, was up 2.8% on a year-over-year basis in April, while the core price index slipped to a 1.6% pace from 1.7%.
The income and consumption data for the months of the fourth quarter of 2004 and first quarter of this year revealed all the large revisions that were signaled in yesterday's gross domestic product (GDP) report. The savings rate was boosted by roughly 0.4% in each recent month due to the revision, leaving a 0.4% figure for April.
In general, income before and after taxes posted substantially bigger gains in the last two quarters than previously reported. This puts upside possibilities into all the wage, employment, and GDP data as each set of report reaches its scheduled annual revisions.
The slower shrinkage in the savings rate, associated with the stronger income trajectory in the revised figures, is good news for consumption. But the restraint in the April spending data has prompted a downward bump in our second-quarter real consumption growth forecast to 3.6%, which is a repeat of the first-quarter growth rate. Note that the big chain price gains of the last two months should be partly unwound in May, given the energy price reversal, hence reducing the market implications of recent price strength in the report.
In total, the income and consumption data reveal a solid but stable expansion pace for household income and spending, but a moderation in growth from the large but unsustainable gains seen in the last two quarters of 2004. Solid fundamentals, including still-low interest rates, soaring home prices, ongoing fiscal stimulus, and an improving business investment climate are all contributing to a solid growth path for household balance sheets, despite "soft patch" fears.
Englund is chief economist for Action Economics
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