Personal Spending Flat, Incomes Rise
We talked about the state of the US consumer – the factors that had led to a pickup in spending in late 2011, but also the headwinds facing spending in the early part of 2012.
In the fourth quarter GDP release personal consumption rose 2%, weaker than forecasts of a 2.4% increase. That amounted to a 1.45 percentage point contribution to GDP.
In Monday’s session we got the latest readings on personal spending and incomes and the results were quite interesting. Personal spending was flat in December – showing some retrenchment by US consumers following a burst of activity in September, and then slight gains in spending in October and November.
But while spending did not increase, personal incomes rose by 0.5%. 
That is a good development in that it makes any future personal spending increases more sustainable. Over the last year wages have flat lined around 0%.
This shows that in December, US household saved their extra earnings, with the savings rate hitting a 6-month high.
Though less spending implies that the momentum in the economy will be hard pressed to pick up its pace.
Therefore today’s report could be implied as a negative for risk equities and risk sentiment.
The key element to turn the relatively better US data in the last few months into something more meaningful would be the ability of the private sector to continue to step up hiring.
Subsequently, a rise in wages would create better sustainability for consumer spending.
On Friday we get the January non-farm payroll report which is expected to show 150K jobs added during the month. While that figure is above the amount needed to keep up with new entrants into the labor force, it’s not be enough to seriously dent the unemployment rate. However, because of a drop in the labor participation rate the unemployment rate has come down to a three-year low.
US growth prospects are key to what the Fed may do next after committing to key interest rates near 0% till the end of 2014. How willing the FOMC will be to undertake further purchases of mortgage-backed securities to help inject more liquidity into the market? If the employment picture deteriorates, then the prospects for the USD will also weaken.
Nick Nasad is the Chief Market Analyst at IBTrade and FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
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