Personal Income Growth Stable

This is going to take some explaining, but personal income growth is running stable at about 5 1/2 percent annual growth.

That upward spike in December 2004 was the Microsoft dividend.  The second downward spike, in December 2005, was 12 months after the Microsoft dividend, which made the 12-month comparison look lousy.  The first downward spike was Hurricane Katrina.  Now, ignoring the spikes, personal income is growing at about a 5 1/2 percent rate, slowly decelerating, with a tad more deceleration to come.  Look for about 5 percent growth through the rest of the year.  That’s not bad.

Consumer spending is growing at a sustainable, 3 percent pace:

The 4 percent growth rates of the recent past were unsustainable–simply growing faster than our underlying ability to produce goods and services, and our underlying income growth.  What we see now is sustainable indefinitely.

Inflation looks OK.  The inflation indexes that come out of the personal income report are more accurate than the Consumer Price Index, and this is the inflation data the Fed focuses on:

The red line ("core inflation," which excludes food and energy) is more important than the all items line.  The decline in the core inflation rate should be comforting to the Fed.  There’s good reason to expect "bleed through" of energy prices to non-energy goods, as when diesel fuel costs are passed on by truckers to general retailers.  But the red line shows not too much of this is happening.

Business implications: Aside from energy prices, the macro-economy is pretty much where it ought to be.  The Fed does not need to add stimulus, nor take it away.  Look for stability this rest of this year.  Possible wild cards, though, are energy prices and housing bubble unwinding.  More on those later.