Income Surge Renews Fears of Inflation
Americans’ personal incomes surged in February, led by gains in wages and salaries, a reminder that Federal Reserve Board Chairman Alan Greenspan’s concern about wage-driven inflation may prove to be on target.
Personal incomes surged 0.9%, the largest gain in eight months and more than double January’s 0.4% advance, the Commerce Department said.
Spending growth--0.3%--was relatively modest but came after a large 1% increase in January, the best in 11 months. February’s rise was the smallest since a 0.1% increase in September as consumers put more into savings.
Economists said February’s broad-based income gain--with advances in every category except farm income--will help provide consumers with the wherewithal for strong spending through midyear. About four-fifths of the advance came in wages and salaries of private-sector jobs.
Most analysts said the report, especially the gain in incomes, indicates continued strong economic growth in the January-March quarter, which will probably keep Fed policymakers on edge.
Stocks plunged for a second trading day in a row amid concerns that rising prices and continued growth will boost the odds of more Fed interest rate increases, which could hurt corporate profits.
“You’re going to see an increase in spending in the months ahead,” said William Sullivan, a Dean Witter Reynolds Inc. economist. “This is a vibrant economy.”
The Dow Jones industrial average fell 157.11 points to close at 6,583.48, exceeding the decline of more than 140 points Thursday, the last day of trading before the Easter holiday. The Standard & Poor’s 500 index slid 4.2% during the last two trading days, the worst decline since Iraq invaded Kuwait in August 1990. Bond prices weakened, driving the yield on the benchmark 30-year Treasury bond to 7.09%.
The Fed last week boosted short-term interest rates by a quarter of a percentage point, its first increase in more than two years. The central bank cited the risk that strong demand might fire up inflationary wage and price rises.
Consumer spending on goods and services fuels about two-thirds of U.S. economic activity. It was a major force driving growth at a sturdy 3.8% annual rate in last year’s final quarter, and analysts now predict growth exceeding 3% in the quarter just ended.
“Almost certainly there is more Fed action coming,” said Robert Dederick of Northern Trust Co. in Chicago. “The question is the timing and the degree.”
The central bank’s policy-setting Federal Open Market Committee next meets May 20.
Consumers used some of their extra earnings in February to bolster savings, boosting it to 5.5 cents of each dollar earned, from 5.1 cents in January.
Commerce Department officials said it was the highest savings rate in five months, since 5.6 cents out of each dollar earned was put into bank accounts or other forms of savings in September.
Jerry Jasinowski, president of the National Assn. of Manufacturers, cited the slower spending as a sign that there is a greater risk of an abrupt economic slowdown than of accelerating inflation.
“The danger is not inflation, but anemic growth,” Jasinowski said, predicting that consumer spending for all of 1997 probably will not exceed real income growth because levels of consumer indebtedness are too high to permit it.
The big jump in February incomes clearly flowed from strong job creation.
There were 339,000 jobs created in February, the government reported at the beginning of March. The Labor Department is scheduled to release employment figures for March on Friday amid expectations that an additional 182,000 jobs were generated.
Separately Monday, Chicago purchasing managers reported that their Chicagoland Business Barometer rose to 57.5 in March from 56.2 in February on a pickup in new orders and production as well as increased hiring.
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Personal Income
Seasonally adjusted annual rate, in trillions of dollars:
February: $6.71
Source: Commerce Department
Personal Spending
Seasonally adjusted annual rate, in trillions of dollars:
February: $5.33
Source: Commerce Department
