The United States (U.S.) Commerce department reported consumer incomes grew at the fastest pace in December compared to the previous eight months. Americans increased savings rather than spending the additional income. Personal income grew at 0.5% rate better than the 0.4% economists had projected. The savings rate grew to 4.0%. Yet, overall consumer spending for the month saw no change, resulting worse than analysts had projected at 0.1%. The savings rate for the month is the highest seen since August 2011. On average, the final quarter ending December 2011 for income only slightly increased. In the quarter, consumer spending increased by a 2.0% annual pace.
Unemployment remains high in the country while state and local government spending has decreased for six consecutive quarters. Analysts project that unemployment increased to 8.6% in December. Additionally, housing prices continue to lower. These things combined are leaving Americans feeling financially thin.
Yet, the labor market exhibited signs of improvement in the later part of the year (2011) and in addition to improving consumer incomes, these factors should result in the additional jobs. The Federal Reserve expects unemployment to lower to 8.2%-8.5% at the end of 2012. Consequently, increased employment will result in higher incomes and increased spending.
The price index for personal consumption, which measures inflation, raised only 0.1% in the month of December compared to the previous month although on an annualized basis increased 2.4% compared to the previous year. This was greater than the Fed’s targeted 2.0% goal but lower than the previous registered year increase of 2.9% in September. The Fed projects annual inflation will be within 1.4%-1.8% this year (2012).
The EURUSD ignored the US data and reacted mostly to European fears. With the EU summit under way markets were down on negative sentiment. The EURUSD dropped 130 pips with further downside to be expected in the coming days.
Eugene Ross, Analyst
Admiral Markets
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