How The Fiscal Cliff Freakout Boosted Income

Business Insider

Personal income unexpectedly surged 2.6 percent in December, against expectations of a 0.8 percent rise.

Household income rose at its fastest pace in a decade, according to Millan Mulraine at TD Securities.

But this was largely driven by a wave of corporate cash dividends that were intended to beat a potential year-end tax-hike.

This was one of the major components of the "fiscal cliff" debate.

"Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates," according to the BEA press release. "Personal income in December was also boosted by lump-sum social security benefit payments."

Dividend income increased by 34.3 percent month-over-month (MoM) and wage and salaries rose by a stronger than usual 0.6 percent MoM, according to Paul Dales, senior U.S. economist at Capital Economics

It is precisely because of this one-off dividend payment that Dales believes this rise in personal income won't be sustained.

"Without these effects, income would have risen by something like 0.5% m/m. A corresponding fall in dividends and bonuses in January, together with the hike in payroll taxes, will reduce income this month. In fact, the net effect will be negative so annualized consumption growth in the first quarter will be much weaker than the fourth quarter’s 2.2%"

He also writes that the 0.2 percent rise in spending is not encouraging and that the payroll tax hike has impacted confidence in January.

Dales expects that improving employment trends means "households won't roll over entirely" and he sees a 1 percent annualized rise in real consumption.

Mulraine is a bit more optimistic. He writes that the improvement in wage growth and no real inflation concerns give the Fed room to continue to pursue their loose monetary policy. Plus all the additional income that went to savings will boost personal spending in coming months.

SEE ALSO: Optimists Are Ignoring Two Key Points About The Housing Recovery >

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