Today’s release [3] covers personal income and consumer spending for the month of January. The big news is on the income side where personal income increased 1.0 percent in January -- the largest increase since May 2009 and substantially higher than private expectations of 0.4 percent. Why did income go up so much? The bottom line is that income was substantially boosted by the tax cuts the President signed in December. More specifically, the jump in income in January from December was driven by the reduction in the withholding rate for social security from 6.2 to 4.2 percent. Wages and salaries, the largest component of income, rose a modest 0.3 percent -- this number may have been reduced by more severe than usual weather in some parts of the country, so I wouldn’t be surprised if we see a bounce in February (we’ll get an indication if there is any credence to that hypothesis in Friday’s employment report).
Real consumer spending edged down 0.1 percent in January, however it has already risen a moderate 0.8 percent at an annual rate above its fourth-quarter average. As this is only the first month of the quarter, let’s not place too much weight on this number. Also, keep in mind that the savings rate shot up in January (more income, but not that much more spending means that savings increased) after having trended down since last summer. Again, I won’t be surprised if we see a jump in consumer spending in the coming months as the savings rate drifts back down some.
A risk to consumer spending is energy prices, and one part of consumer spending that always receives attention when oil and gasoline prices move upward is energy. The most comprehensive source of consumer spending on energy is maintained by the Commerce Department's Bureau of Economic Analysis (BEA), and is updated by in BEA’s releases on personal income and outlays (such as today’s release). According to BEA, consumers spent $583.4 billion on energy goods and services in 2010.1 Purchases of gasoline and other motor fuels account for about 55 percent of consumer expenditures on energy, with most of the remainder is for utilities.
One way to look at consumer spending on energy is to examine it as a share of total spending. As shown in Figure 1, in 2010, about 5.6 percent of total personal consumption expenditures went to energy, well below the 1981 high of 9.1 percent. However, despite the long downward trend, there have been periods when the share of consumer energy spending has climbed appreciably. These episodes reflect jumps in energy prices since the quantity of energy consumed tends to remain mostly constant in the short-run (that is, the consumer demand for energy is not very elastic).
The latest increase largely reflects higher oil and gasoline prices. Gasoline prices surpassed $3.00 per gallon in late December. By late February, gasoline prices passed $3.37 per gallon and crude oil prices approached $100 per barrel (or $2.38 per gallon).
Higher gasoline prices act like a tax and adversely affect consumer spending: money spent on higher fuel costs is not available for other things. As Figure 3 shows, during 2005-08, changes in energy and non-energy consumer spending tended to move in opposite directions. However, during the worst of the recession and early in the recovery, both series moved together. This concurrence was driven more by broad shifts in income -- which depressed spending across the board -- than by energy-related price effects.
One indicator of consumer spending to watch in coming months if energy prices remain high and/or continue to rise will be sales of new cars and light trucks. It will be interesting to see if higher gasoline prices diminish the appetite for light trucks, which generally are less fuel efficient than cars and have tended to decline more during episodes of higher fuel prices.
~Mark Doms, Chief Economist, U.S. Department of Commerce
- 1. This is the direct amount that consumers pay (such as for utilities and gasoline), not the indirect amounts that reside in the prices of other goods (the price of goods include the cost of energy used in production and transportation, for instance).
