From Inflation to Tax Cuts, One U.S. Report Has It All Thursday

(Bloomberg) -- Early hints on how tax cuts are boosting the U.S. economy. New signs of whether price pressures are flowing into a key inflation metric. An update on America’s low, low saving rate. And, above all, how consumer spending is holding up.

Welcome to Thursday’s report on personal income and spending from the Commerce Department. The January figures will garner more attention than usual because they’ll cover the first month since the tax-cut legislation was signed and will provide the final reading on the Federal Reserve’s preferred price gauge before March meeting on interest rates.

Here’s a guide to the most noteworthy components of the report.

From Inflation to Tax Cuts, One U.S. Report Has It All Thursday

The effect of the tax cuts may be tricky to ascertain. Incomes probably climbed 0.3 percent in January after a 0.4 percent increase, according to the Bloomberg survey median. In the wake of the tax cuts, several companies announced one-time bonuses, and last month was also the time many Wall Street firms typically give annual bonuses.

While these moves likely supplemented workers’ pocketbooks, all employers may not have immediately made changes in tax withholdings, so income data may not show the full effect of lower taxes. The forecast for a smaller month-over-month advance could also reflect fewer hours worked in January.

The income data for January “are likely to have a lot of moving parts,” said Ryan Sweet, an economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. As for the tax-cut boost to spending, “it’s more likely to be a February-March story.”

From Inflation to Tax Cuts, One U.S. Report Has It All Thursday

The effects of lower taxes may also be less noticeable in the short run on consumer spending, which accounts for almost 70 percent of the economy. The median estimate in a Bloomberg survey of economists shows consumption rose 0.2 percent last month after a 0.4 percent advance in December. The forecast for a smaller advance indicates households are taking a breather following a late-2017 surge in purchases. Recent reports showed a pullback in demand for automobiles and an unexpected decline in January retail sales. 

Nonetheless, the labor market remains a solid tailwind, and Americans’ confidence is at a 17-year high. Those are among reasons why economists expect any moderation in spending to be short-lived.

What Our Economists Say

Analysts will look to the spending data for clues as to whether the retail sales stall in January was a precursor to a more pervasive pattern in overall household consumption. On a similar theme, the savings rate will garner greater attention in light of the slide over the past several months, which may have inflated spending to a greater degree than underlying fundamentals would have supported. Lastly, the core PCE deflator, the Fed’s preferred inflation metric, will be watched to see if it fully replicates the upside surprise which occurred in the January CPI data.

-- Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Economics

Worker pay -- the weakest piece of an otherwise strong labor market -- has moved up on the watchlist of investors and economy watchers since average hourly earnings posted an outsized gain in January. That set off a stock-market rout on concerns that a pickup in wages would spark inflation and prompt faster interest-rate hikes by the Fed.

Thanks to that sequence of events, all eyes will be on the Fed’s preferred measure of inflation, which is tied to personal consumption. Economists project the gauges -- overall and excluding food and energy -- edged up in January from the prior month, though the year-over-year gains probably matched those in December.

Excluding food and energy, so-called core prices rose 1.5 percent from January 2017, according to the survey median. For context, the Labor Department’s consumer-price index data, released two weeks ago, showed faster-than-expected price growth on a monthly and annual basis.

From Inflation to Tax Cuts, One U.S. Report Has It All Thursday

Finally, the report will also offer an update on the saving rate, which plunged to a 12-year low in December. Some Americans may have decided to use the money from lower taxes to pay down debt, or socked away the extra cash, in which case the rate may have ticked up in January.

From Inflation to Tax Cuts, One U.S. Report Has It All Thursday

As with all economic data, one month doesn’t make a trend, and certainly for the impact of the tax cuts, it’s early days yet.

©2018 Bloomberg L.P.