Good income and spending numbers have a lot of "buts" attached to them

Today featured a raft of US economic data, and among it was October’s personal income and spending report. And the topline numbers for income and spending indicate the economy might have kicked into another gear last month.

Consumers boosted their spending in October at the fastest pace in seven months, while their incomes rose by the largest amount in nine months — both good signs for future economic growth.

Consumer spending rose a sharp 0.6 percent last month, the Commerce Department reported Thursday. It was the biggest increase since a similar gain in March and was three times faster than the 0.2 percent September performance. Incomes, which provide the fuel for spending, were up 0.5 percent in October, a significant pickup from a 0.2 percent September gain.

So why did the stock market stop its 3-day rally and turn downward on Thursday and why did the 10-year note fall under 3% at one point (well, other than the legal walls crumbling around our crooked President)? Because if you dig into the report itself, it shows that there was one particular anomaly that inflated the growth in income.

The increase in personal income in October primarily reflected increases in wages and salaries, proprietors’ income, and government social benefits to persons (table 3). Farm proprietors’ income increased $11.6 billion in October, which included subsidy payments associated with the Department of Agriculture’s Market Facilitation Program.

Reports have indicated not all of those farm subsidies seem to have reached their targets, and the checks that have come in aren’t doing much to stem larger farm losses in Wisconsin and other places. Also intriguing is that non-farm “proprietor income” rose by $13.6 billion after a decline of $9.7 billion in September. That indicates that perhaps some of these October figures are related to October 1 falling on a Monday, and moving incomes into that month instead of the end of September (the same thing happened for government spending figures in DC).

Take out all factors outside of proprietor’s income, and the increase from September was 0.37%. That’s not bad, but it’s also no different than we’d been seeing in most of the Summer. Even with that inflated proprietor income, October marked the 8th straight month that personal saving declined in the US, with Americans saving nearly $160 billion less than they did in February. This is despite incomes continuing to nominally rise, which usually would lead to some portion of that extra money being saved.

In fact, Americans saved more money in Oct 2017, before tax cuts allegedly gave them more disposable income to save, than they did last month. Which means that the rate of saving is at its lowest levels in 5 years.

Now, you could argue that this is a good thing, as consumer spending is 2/3 of the country’s economy and that it indicates confidence in current and future economic conditions. But we’ve been down this road of individuals, corporations, and the US government spending beyond their means and being over-indebted. It usually doesn’t last for long, and it doesn’t tend to end well.