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First Cut: March personal income increase disappoints, but wages and salaries do not; personal consumption solid; inflation tame

The data on personal income and spending for March – which concludes the catch-up after the partial federal government shutdown – ended the first quarter 2019 on a positive note.

While overall personal income was up only 0.1% month-over-month in March, wages and salaries were up 0.4%. This was another in a string of solid, steady increases that extends well back into 2018. For the first quarter 2019, income was up 3.3%, off the pace of up 5.3% for the fourth quarter 2018. However, increases in wages and salaries were fundamentally unchanged at up 4.5% in the first quarter after up 4.6% in the fourth.

Personal consumption expenditures jumped 0.9% in March from February as the three main categories all rose. Strongest was for durables up 2.3% after three months of declines. Nondurables were up 1.4% as gasoline prices were on the rise. Spending on services was up 0.5%, a bit above the recent trend. The arrival of decent sized tax refunds and reductions in uncertainty about economic prospects probably helped loosen some pent-up demand. Personal consumption expenditures were up a modest 1.8% for the first quarter after the slow start in January and February after the moderate up 4.0% in the fourth quarter.

The PCE deflator for March was up 0.2% from February, an only mild increase that mainly reflected the 0.6% rise in nondurable that was probably from gasoline prices. The core PCE deflator was flat compared to the prior month.  Compared to the year-ago month, the PCE deflator was up 1.5%, a slight acceleration from recent months. The core measure was up 1.6% compared to March 2018, notching down for a third month in a row.

The FOMC will have plenty of evidence about the strength in the labor market when it meets on April 30-May 1. Adding into this will be that taut conditions are forcing businesses to continue to improve wages and benefits to attract and keep workers. The FOMC will not see much pass-through into prices. However, they will be alert to the possibility due to the persistence of the data. The numbers for price stability relative to the 2% objective will give the Committee enough reason to keep rates on hold in spite of surprisingly vigorous growth of 3.2% in the advance estimate of first quarter GDP.

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