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Increase in Nominal Personal Income Doesn't Indicate Higher Inflation


Until inflation appears, Treasury yields may not move significantly higher.

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Nominal personal income rose 3.1% year-over-year in February of this year. Nominal personal consumption rose 3% through February. Extrapolating the average growth rate into March, nominal consumption should grow 0.645% (median plus or minus 0.035%) in the first quarter, which would be up 3.14% year-over-year in nominal GDP terms. Since that makes up 68% of nominal GDP growth each quarter, that's a pretty safe assumption on where the actual growth rate will be.

On the consumption front, given the difference between the November and the February months, it appears that the incremental spending pickup was done from the usage of credit rather than a change in personal income. This explains the jump in consumer credit that occurred over those months.

I found some interesting data within the report. Of the $89 billion in annualized growth in personal income year-to-date, 48% of that was due to government social benefits, deriving from Medicare, Medicaid, and "other." (Professor Pinch, a Buzz & Banter contributor, located an old document describing what "other" is, if you're interested.) According to the Bureau of Economic Analysis (BEA), the sizable jump in Medicaid and Medicare payouts are due to expanded coverage under the Affordable Care Act and partially offset by extended unemployment benefits rolling off.

So, I backed out the transfer payments to see what the "real" growth rate is for nominal personal income, and it is 3% year-over-year, which is right on top of nominal consumption growth at 3.1%. It is up marginally from the 2.89% annual average in 2013, but to be frank, that's just a rounding error in the grand scheme.

The main takeaway here is that at this moment, there is no inflation push that would argue for measurably higher yields. Do I think that there will be lower yields? No, but the main enemy for a fixed-income investor is inflation, and there's no real sign of it yet.

I've included some charts below of personal income ex-transfer payments versus personal consumption, and of real personal consumption versus real disposable income. They all show the same thing: a decelerating trend, which highlights that there will be a low growth rate for a while.
Click to enlarge
Click to enlarge

Twitter: @MichaelSedacca

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