Given the backdrop, it was doubtful that market participants were inclined to read too much (if anything) into Friday’s data out of the US, but for whatever it’s worth, personal income and spending in January were essentially in line.
Spending rose 2.4% versus expectations of 2.5%. This comes on the heels of a blockbuster retail sales print, which many attributed to stimulus payments. Some said that presaged a dramatic (and inflationary) upswing in spending once Joe Biden’s relief plan is injected into the veins of the world’s largest economy.
Incomes, meanwhile, surged 10% last month. Consensus was looking for a 9.5% rise.
Obviously, that reflects federal aid. “The increase in personal income in January was more than accounted for by an increase in government social benefits to persons as payments were made to individuals from federal COVID-19 pandemic response programs,” the BEA remarked.
The figure (below) illustrates the point. The chart shows the sharp rise in “other” benefits.
As noted in the chart subtitle, that’s mostly due to economic impact payments. Unemployment insurance rose as well, as supplemental payments under emergency programs for the jobless resumed under the CRRSA Act.
Critics will adopt one of two narratives. One is the Larry Summers argument, which just says that another boost to incomes like the one evident in the figures above isn’t necessary at this point, and risks overheating the economy.
A second line of criticism revolves around the notion that this isn’t sustainable. That we’re simulating incomes, just as Fed support is creating artificial demand for corporate bonds and thereby encouraging leverage and forestalling creative destruction. Effectively, the argument is that not much of this is “real” anymore.
You can draw your own conclusions or, perhaps more aptly, you can draw your own conclusions on the desirability and/or social utility of the conjuncture illustrated in the visual (above).
The government said Friday that gains in spending for goods were “widespread across all categories.” For services, the increase was led by spending for food services.
Core prices rose more than expected MoM. If you’re inclined to point at that and shout, I suppose I would just gently suggest it may have been priced in over the past several weeks (and over the past 24 hours specifically).
Larry Summers is very smart obviously. But I believe he misses the bigger picture. Most of this government spending/tax cutting now is just to keep things from falling apart. That is a lot different than stimulus in my book. As soon as the prop of government spending is removed, we would go right into the sink- unless of course the virus is brought under control. It is extremely easy to slow things down if that happens. The Fed can raise short term rates, cut Q/E and BIden and Congress can raise taxes on corporations, and higher income cohorts in the country. Also the aid to state and local government is probably a one shot- unless of course we get in a downward spiral with the virus. Anyway spending on that and extended and widened unemployment insurance would be wound down. We are on course in this country to rebalance after 40 years of starving public non-defense goods. Will that lead to lower private consumption- perhaps at the margin. But a later infrastructure bill would probably be additive to demand and consumption, and is long overdue. No, Biden and the administration are on the right track.