U.S. personal income jumps, spending rises on stimulus checks

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Just put these two stats in the category of more 'green shoots' for the U.S. economy. Personal income and consumer spending both rose in May, the U.S. Commerce Department announced Friday, boosted by the federal government's stimulus checks and tax cuts.

Personal income jumped 1.4 percent and consumer spending rose 0.3 percent. Economists surveyed by Bloomberg News had expected May personal income to rise 0.4 percent and consumer spending to increase 0.3 percent.

Excluding one-time payments, disposable income rose 0.2 percent, but wages and salaries fell 0.1 percent. Real consumer spending, which adjusts for inflation, increased 0.2 percent.

Also in May, the U.S. savings rate rose to 6.9 percent – the nation's highest savings rate in more than 15 years.

John Herrmann, president of Herrmann Forecasting in New Jersey, said the thesis that argues the U.S. economy is approaching recovery stage is amassing more evidence.

"People are feeling a little more comfortable trying to resume a normal life and are starting to gradually increase spending," Herrmann told Bloomberg News Friday. "The second-half outlook is definitely better. We're beginning to pull out of the recession."

Inflation remains moderate

Friday's report also indicated that inflation remains under control. The core PCE price index - a key gauge of inflation monitored by the U.S. Federal Reserve – increased just 0.1 percent in May, less than the 0.3 percent Bloomberg News consensus estimate. Further, the core PCE price index is up just 1.8 percent in the past 12 months.

Investors should follow the personal income, consumer spending and PCE price index because they provide three critical economic metrics. Personal income tells investors how much purchasing power citizens have, consumer spending indicates the level of consumption in the economy (which historically has account for 60-65 of U.S. GDP), and the PCE price index is one of the best indicators of long-term inflation in the economy.

Economic Analysis: The big qualifier in the increase in may personal income concerns the stimulus checks: real wages and income are roughly flat, which is something you'd expect during a time of slack demand for labor and professional services. Hence, excluding one-time gains, there's no wage pressure. Still, economists and investors will take the one-time income gains, as it increases aggregate demand – something the U.S. economy really needs.

Further, in normal times, the high savings rate would be a plus, particularly on the heels of more than 5 years of below-average savings by Americans: U.S. citizens do need to save more. However, the problem with a high savings rate now is that it takes that many more dollars out of an already commerce-constrained U.S. economy.

Hence, it is a dilemma of sorts: Americans need to save more but the economy needs more dollars working in it - - and that only underscores why no one should fear a rise inflation. There aren't enough dollars working in the U.S. economy right now - - the main reason a large stimulus package was passed, and why another package may be needed down the road. Inflation remains inert, which should keep the inflation hawks in their nests. The greater risk for the economy remains deflation, not inflation.

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