February 02, 2004

Disposable Income Currently Indisposed

Topping the eco news today, disposable personal incomes grew at 0.1% in December. That was after the tax-cut and rebate boost of the third quarter when incomes grew at over 8%. In other words, there were no cash-bonuses under the Christmas tree for most Americans (or in the mailbox, for those who don't celebrate Christmas.) The big bombshell in the Q4 GDP report is that the total fourth quarter expansion in disposable income of $1.7 billion was 99% lower than the third quarter expansion of $160 billion. Hat tip to the always-reliable Greg Weldon for the legwork on this. This falls into line perfectly with our strategy laid out last week of being bond bulls and equity bears. It's probably bad news for durable goods manufacturers who were already reeling from the recent subpar report. That's what you get though, when you front load consumption through artificially low rates. Discretionary spending on non-big ticket items falls when consumer incomes tighten. Even if tax refund windfalls are large this year, a possibility, the weak labor conditions make it more likely that the savings rate (currently 1.3%) will go up, rather than consumer spending. Of course, I could be wrong and Americans may keep spending far more than they make, even as they make less. Other highlights (or lowlights as the case may be) from the report (and all this courtesy of my fried Greg Weldon): *the personal savings rate was down to a new low. It came in at 1.5%, down from 2.3% in the third quarter *Personal consumption was down too. Finals sales to domestic buyers were up 3.1%, but that was less than half the third quarter pace of 7.2%. More evidence that the stimulus is less stimulating. *Wages and salaries rose at 0.5% in the third quarter. This was half the rise of first quarter, and down from Q3's 0.7% rate. In summary: incomes are stagnant, disposable income is vanishing, the stock market is still priced for utopia.


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