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Data released on Friday in the US showed that personal income rose 0.2% and spending 0.3% in December. Despite a tight labor market, year-over-year real personal income growth was just 1.7% after taking out transfer payments from the government, explained analysts at Wells Fargo. 

Key Quotes: 

“A decrease in subsidy payments to farmers was a factor behind a $36.2 billion drop in farm proprietor’s income in December. That was the primary culprit for the softer income growth.”

 “While the absence of subsidy payments explains some of the softness in December, income growth is cooling on trend.”

“The fastest growing major category for income in 2019 was transfer payments from the government, which ballooned from $123.4 billion in 2018 to more than $200 billion in 2019.”

“Without the increased payments from the government, year-over-year real income growth slowed to just 1.7%, the weakest since 2016.”

“Consumer spending decelerated a bit in the fourth quarter with the annualized growth rate of real personal expenditures slowing to 1.8%. It was an uncharacteristically choppy year for consumers spending, with a curiously weak Q1 followed by a big surge in Q2 and more trend-like growth in the second half.”

“Core PCE inflation will be slower to rise in our view, but it still ought to gradually come closer to the target 2.0% rate. That will likely be enough to satisfy the Federal Open Market Committee that monetary policy is sufficiently accommodative without stoking significantly higher inflation. We expect the Fed will remain on hold for the rest of the year.”