Personal Income Declines beyond Expectations amid Rising Job Losses!

Mounting job losses in the United States seemingly hurt personal income as it declined more than estimates; however consumer spending rose though it remains rather weak amid the worst recession since WWII, while inflation pressures continue to ease amid the ongoing recession and the worst financial crisis since the Great Depression.

Personal income declined by 1.3% in June following the prior revised rise of 1.3% and worse than median estimates for a 1.0% drop, while personal spending rose by 0.4% following the prior revised drop of 0.3% yet better than median estimates of 0.3%, meanwhile PCE deflator declined by 0.4% following the prior revised drop of 0.3%.

Also core personal consumption expenditures; the Federal Reserve Bank’s favorite indicator for inflation rose by 0.2% inline with median estimates and following the prior reported rise of 0.1%, yet compared with a year earlier core PCE rose below expectations at 1.5% and down from the prior revised rise of 1.6%.

Rising spare capacity amid the ongoing recession continues to weigh down on inflation, not to mention the effect of rising unemployment as it continues to suppress consumer spending which counts for nearly 2/3 of economic activity, and accordingly it continue to weigh down on inflation as well.

The Feds expect upside risks to inflation to remain under control amid the ongoing recession, especially as they expect the economy to recovery gradually and over a very slow pace, and accordingly the Feds are still focusing their efforts right now to reviving economic growth, which means their Dovish stance should continue to prevail until they make sure the economy is on its way back to its long term growth potentials.

Yet the Feds will eventually shift their stance into a Hawkish one, as the huge amounts of liquidity that were pumped into the financial system will increase money supply and accordingly will increase inflation over the long term, however the Feds seem to have the proper tools to withdraw the excess liquidity when needed according to the Feds’ Chairman Ben S. Bernanke.

However, the main priority for now is economic growth, as the Fed needs to make sure that downside risks to growth have vanished and that the recession is finished once and for all, and right then they can focus on other matters including upside risks to inflation.

Yet I still believe it’s too early to leave the Dovish stance, as economic conditions may have started to stabilize recently but the story doesn’t end here, since the economy is still under threat of further deterioration amid rising unemployment, which could lead the economy back to recession.

Unemployment surged in June to a 26-year high at 9.5% and is still expected to continue rising over the course of this year and might indeed exceed 10% before this year ends, this week the U.S. jobs report is expected to show that unemployment continued to surge in July, as U.S. employers continue to layoff more workers.