Slowing Growth?

The latest data regarding the personal income received by Americans has me slightly worried. The headlines of stories about today’s BEA news release have been along the lines of “Real spending falls 2 months in a row“. But I’m actually more concerned about real income growth.

Take a look at the following picture. It shows the 12-month growth in real disposable personal income. After two years of pretty good income growth, this year has seen a decided slowdown in such growth. Over the past 12 months real income grew by just 1.5%. Meanwhile, the savings rate was actually negative for the full third quarter – the first negative quarterly savings rate on record.

A negative savings rate is only sustainable for a short period of time, and depends on rapidly rising asset prices. If you add together slowing income growth with the fact that the savings rate will almost certainly rise as the housing bubble slows (or pops), the likely conclusion is that consumption spending will slow.

Meanwhile, Calculated Risk has outlined how the economy is likely to respond to the apparent slowdown in the housing market. Furthermore, business spending is showing some signs of gradual cooling (as I mentioned last week), and in general the economy seems to be slowing slightly from its 2004 pace. Finally, the risk of a coming upturn in the core rate of inflation seems real.

Add all of these trends together, and I’m starting to worry about the economic outlook for 2006. Slowing growth, with possibly higher core inflation… Ben Bernanke may start his tenure as Fed chair with some tricky monetary policy management to do.