Interesting article about why consumers have been able to withstand higher oil prices.....
Income Story Still Dwarfs Energy Spike
By Tony Crescenzi
RealMoney.com Contributor
8/2/2005 12:00 PM EDT
The puzzle over how consumers have been able to withstand high energy costs is easily solved with Tuesday's data.
Personal income rose 0.5% in July, putting the year-over-year gain at 6.8%, well above the long-term average of about 5.1%. The added 1.7 percentage points of income growth, which amounts to about $150 billion, is perhaps the best explanation as to how the U.S. economy has remained resilient in the face of high energy prices. The $150 billion is significantly more than the nation's net increase in its energy tab, which amounted to about $100 billion last year.
Proprietors Faring Very Well
June's gain in personal income was boosted significantly by both proprietors' income and interest income, which accounted for 40% and 30% of the monthly gain, respectively. The gain in proprietors' income has been a key feature of the economy and is a reflection of the sharp increase in self-employment that has occurred over the past few years. Whether it's eBay sellers, computer consultants or Web designers, the economy is composed of more than just big companies these days. Proprietors' income is now up 8.4% vs. a year ago.
Investors would be wise to shop for companies that are catering to the self-employed and to small businesses, as well as for companies benefiting from outsourcing, which is in the midst of a secular upturn. Large companies are continuing to streamline, and this is bolstering the fortunes of others.
Interest Income Increasing Sharply
The gain in interest income puts it on a path to increase by about $1 trillion this year, roughly $80 billion above the level of two years ago. The $80 billion obviously gives consumers added spending power and is an important offset to the rise in debt-servicing costs. The fact is, consumers are net creditors, receiving more interest than they pay (there are distribution issues here with respect to who gets the income, but the point is that the added interest income is an offset to the consumers' increase in interest expense).
Dividend income also has been a key feature of the strong gains in personal income, increasing 9.4% over the past year, or roughly $44 billion. Again, there are distribution issues here, too, and this somewhat reduces the importance of the gain, but the gain is nonetheless a partial offset to the interest expense that consumers have been experiencing as a result of the Federal Reserve's interest rate increases.
Inflation News Is Benign, but...
The personal consumption expenditures core deflator, the most widely followed inflation figure at the Fed, was flat in July, an excellent reading (consensus was for a gain of 0.1%). This is helping the bond market. That said, benchmark revisions to past months put the PCE core deflator at 1.9% year over year, two-tenths of a percentage point higher than expected and at the upper end of the Federal Reserve's target range. The gain is the most since an anomalous spike in July 2002; excepting that spike, the gain is the most since December 2001.
Tuesday's economic news is important, and investors would be wise to continue to track it, particularly the data on personal income, especially in the context of rising energy costs. The energy-price rise is important in and of itself, but the income story is more dominant. Those who have bet that energy prices would wreck the economy and hence the stock market have bet wrong. That said, should the gains in personal income slow, the importance of any energy price rise would become amplified. There's just no sign of that on the horizon, now that the economy is experiencing a growth spurt.
AI
