Personal disposable income growth jumped 2.8% in December, more than twice the increase in November. All of that acceleration may be attributed to special dividends and early bonuses that were released to top income earners by their employers as a way to avoid higher income taxes associated with the fiscal cliff negotiations. Indeed, personal disposable income growth actually decelerated in December if that hedging that we saw at the end of 2012 is excluded. The only category of income to rise more rapidly in December than in November was transfer payments (government benefits like Social Security), not exactly where we would like to see the strength concentrated.
The stage is now set for a much larger drop in incomes in January as payback to the hedging in late 2012 and higher tax rates across the board. The expiration of the payroll tax holiday was particularly large and shocking to many.
Personal consumption expenditures rose a much more modest 0.2% during the month, less than a third of November’s pace. Almost all of that gain was concentrated in vehicle sales, which were bolstered by insurance payments and replacement demand following Superstorm Sandy. Spending on services was particularly weak. This is a pattern that we saw earlier in the year, particularly as households held off on going to the doctor and cut back on optional medical procedures. We have yet to see where exactly the weakness was concentrated in December.
The savings rate surged to 6.5% in December from 4.1% in November. Much like the jump in income, however, this increase will be reversed and more in January.
Separately, the price index for personal consumption expenditures (PCE, the Federal Reserve’s preferred measure of inflation) decreased less than 0.1% in December, after falling 0.2% in November. On a year-over-year basis, the PCE price index rose 1.3%, well below the Fed’s target of 2% over the medium term.
Bottom Line: Fears regarding the fiscal cliff appear to have played a larger role in curtailing spending in December than initial retail sales reports suggested. This provides validation to retailers who claimed they never really regained some of the ground lost after Superstorm Sandy. Moreover, tax hikes and uncertainty over fiscal policy are likely to further suppress consumer spending at the start of the year. The only offset is the replacement demand and repairs associated with Sandy, which are not insignificant.