Disposable personal income after adjusting for inflation rose a modest 0.2% in March, after dropping in three of the previous four months. Moreover, the largest increase in income in March came in transfer payments, heavily dominated by an increase in outlays for Social Security. Spending increased a more modest 0.1% after adjusting for inflation, which is much weaker than many would have assumed, given the strong retail sales for the month and the much stronger 0.5% inflation-adjusted gains we saw in February. Spending on services, most notably medical services, has slowed over the last year and actually posted a slight decline in March. The savings rate edged up slightly from 3.7% to 3.8% in March. This is not enough of an increase to ensure that spending continues to increase at the pace we saw in the first quarter unless employment and incomes (most notably in the private sector) increase more dramatically in the months to come. Inflation abated slightly to a 0.2% pace in March, both before and after including food and energy prices. This is still too high for the Federal Reserve, but will likely moderate as we move into April, now that prices at the pump have abated more dramatically.
Bottom Line: Consumer spending outpaced income gains, which still gained a lot of support from the government in the first quarter. This is not an ideal situation for the outlook going forward. Look for spending and inflation to moderate with the unseasonably warm winter weather as we move into further into spring.
Tagsautos budget deficit Case-Schiller China construction consumer drought ECB European debt crisis federal reserve financial crisis fiscal cliff gas prices Greece healthcare housing market inflation Italian elections Japan Japanese earthquake jobs labor market manufacturing Middle East NABE oil quantitative easing retail retail sales Sandy sequestration student loans trade wealth effects