Personal income increased by 0.4% in December
The Bureau of Economic Analysis (or BEA), which is a part of the US Department of Commerce, releases a monthly report on personal income, disposable personal income, and the personal consumption expenditures of US consumers. 2017 has been a strong year for consumers helped by a tightening labor market, which led to an increase in salaries in the private sector. As per the latest report from the BEA, personal income rose 0.4% in December, which took the annual rise to 4.1%.
How does wage growth impact the economy?
Increasing wages for consumers leads to an increase in disposable income. Disposable personal income (or DPI) is the after-tax income available for a consumer to spend. The January BEA report indicated that the real DPI increased 0.2% in December. Real DPI increased 1.2% in 2017 as compared to a 1.4% increase in 2016. An increase in real DPI is considered a positive sign for the economy. Consumers with increased disposable income can invest or spend the excess cash on durable goods, which increases the aggregate demand for products, resulting in increased output from industries (XLI), higher demand for factory workers, and eventually higher wages for workers. This cycle increases the churn in the economy, leading to a higher GDP.
The other positive impact of increasing wages
Apart from increased demand for goods and services, higher wages lead to improvement in the housing (XHB) market as consumers look to property investments. From an economic standpoint, increasing income levels and DPI lead to higher inflation (TIP) levels. In the current economic environment where the Fed is trying to increase US inflation (VTIP) to its 2% target, rising wages could help it achieve its 2% inflation (CPI) target. In the next part of this series, we’ll analyze the change in personal consumption expenditure (or PCE) in December.