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Increase in Nominal Personal Income Doesn't Indicate Higher Inflation
Until inflation appears, Treasury yields may not move significantly higher.
Michael Sedacca    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

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.

http://image.minyanville.com/assets/buzzbanter/charts/original/032814/PCEvPIex_1396015485.gif
Click to enlarge

http://image.minyanville.com/assets/buzzbanter/charts/original/032814/PCEvrealDI_1396015496.gif
Click to enlarge

Twitter: @MichaelSedacca

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

More From Michael Sedacca
Increase in Nominal Personal Income Doesn't Indicate Higher Inflation
Until inflation appears, Treasury yields may not move significantly higher.
Michael Sedacca    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

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.

http://image.minyanville.com/assets/buzzbanter/charts/original/032814/PCEvPIex_1396015485.gif
Click to enlarge

http://image.minyanville.com/assets/buzzbanter/charts/original/032814/PCEvrealDI_1396015496.gif
Click to enlarge

Twitter: @MichaelSedacca

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

More From Michael Sedacca
Increase in Nominal Personal Income Doesn't Indicate Higher Inflation
Until inflation appears, Treasury yields may not move significantly higher.
Michael Sedacca    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

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.

http://image.minyanville.com/assets/buzzbanter/charts/original/032814/PCEvPIex_1396015485.gif
Click to enlarge

http://image.minyanville.com/assets/buzzbanter/charts/original/032814/PCEvrealDI_1396015496.gif
Click to enlarge

Twitter: @MichaelSedacca

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

More From Michael Sedacca
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