Income, Saving, & Confidence All Play Role in Economic Growth

April saw personal incomes increase at the fastest pace this year. The Commerce Department’s Bureau of Economic Analysis announced on Friday, May 27, that personal incomes increased $69.1 billion or 0.7 percent and disposable personal income (DPI) increased $45.7 billion or 0.5 percent. Disposable personal income is the amount of income remaining after taxes are paid.

Personal consumption expenditures (PCE), often called consumer spending, increased $53.6 billion or 0.6 percent which was less than the 0.8 percent rise expected by economists surveyed by MarketWatch. The lower increase was not the result of increased savings. The personal savings rate fell to the lowest level in three years to $37.5 billion or 0.4 percent in April down from $48.1 billion in March.

The lower than expected increase in spending may be indicative of falling consumer confidence found by the University of Michigan’s index of consumer sentiment. The Associated Press reports that consumer sentiment fell to 86.9 in May down from April’s 87.7 level. The lowest level of consumer sentiment in two years was blamed on rising energy bills.

“Consumers may not be as confident as they have been, but that isn’t keeping them from spending,” David Wyss, chief economist at Standard & Poor’s told the Associated Press. “Americans seem to have the idea that when you have a lot of stress, retail therapy is the cure.”

Which may explain why the Conference Board on Tuesday announced that its Consumer Confidence Index for May rose to 102.2 from an April reading of 97.7. According to the Associated Press, the consumer confidence index is now at its highest level since March, indicating a significant reversal of the three-month downward trend from January’s high of 105.1.

In other economic news, AFP reports that the International Monetary Fund’s annual report card on the U.S. economy indicates that it has “solidified” over the last year and is expected to grow at around 3.5 percent for the next two years.

AFP quotes the IMF report as saying “Over the past year, the expansion has solidified as robust productivity growth and high corporate profits have contributed to a strong rebound in business investment and an acceleration in employment.”

Despite this positive forecast, the IMF warns that complex factors are sustaining the current expansion and abrupt shifts in any of them could result in higher interest rates and disorder in capital markets.

“A record-low household saving rate and a large federal fiscal deficit are being supported by unprecedented borrowing from foreigners and domestic firms,” AFP quotes the IMF as saying. “This unusual constellation of financial flows has sustained growth by keeping long-term interest rates low and stimulating house prices. However, this creates a number of vulnerabilities, including the possibility of a marked slowdown of household spending, particularly were the housing market to cool.”

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