Lots of new income in January, but a lot of new taxes and mediocre spending

I said yesterday that we'd get a better idea of how the US economy kicked off 2024. So let's look at the income and spending report for January and see what it tells us.

Personal income increased $233.7 billion (1.0 percent at a monthly rate) in January, according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI), personal income less personal current taxes, increased $67.6 billion (0.3 percent) and personal consumption expenditures (PCE) increased $43.9 billion (0.2 percent).

The PCE price index increased 0.3 percent. Excluding food and energy, the PCE price index increased 0.4 percent. Real DPI decreased less than 0.1 percent in January and real PCE decreased 0.1 percent; goods decreased 1.1 percent and services increased 0.4 percent.

Lots to unpack in this one. Income up by 1%? But real disposable income and spending down? What’s going on with this?

First, what caused the jump in income? It looks to be a combination of year-end dividends from stocks (that for some reason is recorded in January’s figures), and the annual cost-of-living increase in Social Security payments. In contrast, wages and salaries had its lowest increase in 4 months and 2nd lowest since since the end of 2022.

At the same time, there was a $166 billion (annual basis) increase in taxes paid in January. So I looked at that, and it seems to be a historically normal occurrence that happens in years where the stock market goes up, and people pay their capital gains and related year-end taxes. And these January changes have been much larger in the last few years.

And the disparity between a big drop in spending on goods and a sizable increase in spending on services was also an oddity.

The $43.9 billion increase in current-dollar PCE in January reflected a $121.0 billion increase in spending for services that was partly offset by a $77.0 billion decrease in spending for goods. Within services, the largest contributors to the increase were housing and utilities, financial services and insurance (led by financial service charges, fees, and commissions), and health care (led by hospitals). Within goods, the leading contributors to the decrease were motor vehicles and parts (led by new light trucks), gasoline and other energy goods (led by gasoline), and other nondurable goods (led by prescription drugs).

I note the increase in health care and insurance especially. Is that from jacking up rates to start the new year, which also would bump up inflation for the month? Conversely, is the decline in prescription drug spending due to the fact that some people need to spend up their allowance at the end of December, and then things revert with the new year?

So I can’t draw a lot from these figures, as much as I would like to. If anything, I think the numbers are a bit soft because of the decline in wage/salary growth, but still a growing economy and little to be alarmed about at this point.

When the year-start oddities go away in February, next month’s data is going to give a much clearer indication as to whether 2023’s year-end boom in continuing, or if we are taking a breather after such a blowout 2nd half (or worse). We also will get new jobs reports for February and similar information on 2024's second month in the next 8 days. But for now, based on today’s data, I’d assume the while the economy might not be the rocketship we had a couple of months ago, but is still looking good.