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Smith Faculty
Opinion Article |
December 1,
2006 |
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By Dr. Peter Morici, Professor of
International Business
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WEB SITE |
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Personal Income up $49.3 Billion in
October
Savings Rate Improves, Good News for
Stocks
Today, the Commerce Department
reported in October personal income
increased $49.3 billion or 0.4 percent,
disposable personal income increased
$33.1 billion or 0.3 percent, and
personal consumption expenditures
increased $16.9 billion or 0.2 percent.
The price index for personal
consumption expenditures, including food
and energy, fell 0.2 percent in October,
and was up 1.5 percent from October
2005.
The Federal Reserve closely watches
the price index for personal consumption
expenditures, less food and energy. This
core price index increased 0.2 percent
in October, as it did in September. In
October, the index was up 2.4 percent
from October 2005.
As important to the Federal Reserve,
the market-based core inflation index,
which excludes food, energy and imputed
prices like rent on owner occupied
homes, increased 0.2 percent in October,
and has increased 2.1 percent since
October 2.1
Inflation remains stubbornly above
the Federal Reserve target range of 1 to
2 percent, despite flagging growth in
the second and third quarters. The
Federal Reserve is not likely to risk
additional inflation to shore up the
economy by lowering interest rates
Chairman Ben Bernanke will want to
make sure inflation is safely boxed
before stimulating the economy, even if
that risks a recession.
Also, the savings picture improved.
Although consumers continued to spend
more than they earn, the gap narrowed
for the third month in a row. The saving
rate personal savings as a percentage of
personal disposable income was minus 1.7,
1.3, 0.7 and 0.6 percent in July,
August, September, and October.
With housing prices falling and
household wealth shrinking, savings
should continue to improve. Home
purchases are no longer viewed as a
favorable short-term speculative
investment, and individuals are likely
to spend less on new homes and invest
more in the stock market.
Overall, falling housing prices and
more savings should help the stock
market rally continue into the New Year.
Peter Morici is a professor at the
University of Maryland School of Business
and former Chief Economist at the U.S.
International Trade Commission.
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