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Are Tax Cuts Helping US Consumers Spend More?

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Personal income rose 0.3% in April

The Bureau of Economic Analysis (or BEA), which is part of the US Department of Commerce, releases a monthly report on personal income, disposable personal income, and personal consumption expenditures of US consumers.

On May 31, the BEA released its report on personal income and spending for April. The report indicated that personal income rose 0.3% in April. The increase in personal income in April was fueled by rising wages in private sector salaries and increased benefits for veterans and Medicare recipients.

Tax cuts help boost disposable incomes

The April report indicated that real disposable incomes have increased 0.4%, compared to the March increase of 0.3%. The increasing disposable income level is the positive result of tax cuts that were implemented in December 2017. This measure took the annual growth in disposable income to 3.9%, the highest growth rate in a 12-month period in the last three years.

An increase in disposable income translates into higher spending, which has a positive impact on the economy and helps improve inflation (TIP). Increasing inflation expectations drove bond (BND) market volatility in recent months as markets (IVV) expect the Federal Reserve to increase interest rates at a faster pace to contain rapidly rising inflation.

The other positive impact of increasing disposable income

Although rising inflation expectations have been troubling the markets, higher disposable income levels have a positive impact on many sectors. The demand for housing (XHB), automobiles, and consumer goods could increase with rising income and disposable income.

Consumer spending (VCR) has increased 4.7% in last 12 months, with help from higher wages and lower taxes. This trend is expected to continue, as a labor shortage could have a positive impact on wage growth.

In the next part of this series, we’ll analyze the change in the personal consumption expenditures (or PCE) in April.

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