Personal Income Up $29.8
Billion in November:
Savings Negative Six Months in a Row
By Dr. Peter Morici,
Professor of International Business
Today, the Commerce Department reported in November personal income increased $29.8 billion or 0.3 percent, disposable personal income increased $25.1 billion or 0.3 percent, and personal consumption expenditures increased $25.3 billion or 0.3 percent.
Most significantly, personal
outlays exceeded disposable income
by $19.1 billion or 0.2 percent.
Personal savings have been negative
for six straight months, households
are critically stressed, and this
should raise a caution flag for the
Consumer spending, which accounts
for 70 percent of GDP, has been the
primary driver behind the economic
recovery, and six straight months of
negative savings indicate
policymakers cannot count on
consumer spending to power growth in
2006. Business investment must pick
up the slack.
Consumers have been able to
increase spending more rapidly than
their incomes by borrowing against
the rapidly rising values of their
homes and piling on credit card
debt. However, the string appears to
be running out.
Prices for existing homes will
fall this winter, and credit card
delinquencies are nearing 5 percent.
Auto sales have been weak and
holiday retail sales are up only
modestly over 2004. Consumers are
strapped and exhibiting clear signs
Housing prices have moderated
over the last six months and
inventories of unsold houses have
increased. The housing bubble may
not have burst, yet, but the era of
hyper appreciation is over.
Households will no longer be able to
use home equity loans to rapidly
power ever greater levels of debt
The combination of falling
housing values, consumer credit
squeezed to near its limits and
higher prices for fuels to commute
to work and heat homes this winter
are squeezing families.
Household liquidity is perilously
thin and the Fed, by pushing up
interest rates beyond the expected
increase in January, would add
unnecessarily to this pressure.
Inflation poses little threat, and
raising interest rates further
serves no useful purpose.
The post Katrina run up in energy
prices did not create much inflation
in the rest of the economy, and
gasoline prices and petroleum and
natural gas futures did recede in
October and November. Recent
consumer and producer price reports
indicate inflation is well under
Although the Fed is very likely
to raise interest rates on January
31; however, it should not raise
interest rates further.
The nonresidential construction,
new home, auto, mortgage and
consumer credit industries are
potentially vulnerable to
excessively high interest rates, and
weakness in these sectors could
derail the economic expansion.
For the economy to continue
expanding at 3.5 percent a year or
better, business investment will
have to pick up the slack, and the
Fed will have to engineer an
interest rate environment that
permits a cooling of the housing
sector without overly stressing
consumers heavily in debt and
business plans for expansion.
Nonresidential construction was the
weak link in the business investment
in the third quarter, and the Fed
should seriously consider the
implications of further credit
tightening on that sector.
The prospects for weaker consumer
and housing sectors and moderate
inflation, coupled with the need to
encourage business investment,
indicate the Fed should end the
cycle of interest rate increases
If the Fed does not heed these
warning signs of a slowing economy,
it risks throwing the economy into a