Payrolls, Personal Spending Rise As Income Dips

The labor market expanded again last month: private payrolls increased 196,000 in November, moderately more than expected, based on The Capital Spectator’s average econometric projection. Even so, last month’s gain fell short of October’s revised 214,000 rise, although the pace of growth in November still suggests that the economy is creating jobs at a slightly faster rate these days compared with the lesser gains in recent history. Meanwhile, today’s update on personal income and spending brings mixed news. Personal consumption expenditures advanced 0.3% in October—in line with expectations. Disposable personal income, however, retreated 0.2%--the first monthly instance of red ink since January.

Let’s take a closer look at the numbers, starting with payrolls. The trend on this front continues to look encouraging, at least by the standard of the last several months. The absolute level of gains for private payrolls is in the upper range we’ve seen so far this year (although we’ve yet to see anything close to February’s extraordinary 319,000 surge). More importantly, the year-over-year growth rate continues to roll along at just over 2%, echoing the numbers for most of 2013. The steady increase by this yardstick suggests that the labor market's moderate expansion will roll on.

The analysis is a bit more complicated for spending and income. First, the good news. The amount of personal consumption expenditures (PCE) ticked up in October, rising 0.3% over the previous month—a bit faster than September’s pace. Disposable person income (DPI), however, declined in October—the first time we’ve seen red ink here since January. But monthly numbers are noisy and so it’s best to refrain from reading too much into the short-run comparisons. Unfortunately, there’s a more troubling trend to consider.

As the next chart shows, the year-over-year rate of changes for PCE and DPI seem to be sliding lower, albeit marginally so. The annual comparisons for private-sector wages—the main driver of income—also appear to be slipping. The brief reprieve in previous months for these key indicators is fading at the moment, giving way to decelerating growth once more. It’s anyone’s guess if this gradual descent will persist. One reason for optimism is the comparatively strong trend with jobs creation. Since the latest income and spending numbers are one month behind the employment figures, there’s room to reason that PCE and DPI will perk up in the next release in terms of the annual trend.

Still, the margin of comfort is wearing thin for consumer spending and income. Should we be worried? The next clue that will help us decide: the November update on retail sales, scheduled for release on December 12. The tailwind, at least, looks good: retail spending in October rebounded after a flat September. A similarly upbeat comparison for November will be crucial for thinking that the slippery slope for PCE and DPI won't prevail.