20130530 Links

1. Expected income growth in the U.S.; 2. Rising rates in Canada?; 3. Property speculation in China.   ***************************************************************************************************************************************************************************************************************************************************

1. Income growth expectations and forecast consumption growth.

A research note at the Chicago Fed. Conclusion:

This article documents the decline in aggregate consumption during and after the Great Recession. It also explores the relationship between the decline in consumption and the decline in consumers’ expectations about their future income. The analysis uses microeconomic data from the Michigan Surveys of Consumers to study expected income growth. These data show that expected income growth declined significantly during the Great Recession for all age, income, and education groups. It is the worst drop ever observed in these data, and it has not yet fully recovered to prerecession levels. Furthermore, we show that expected income growth is a strong predictor of actual future income and consumption growth. For this reason, forecasts of near-term consumption and income growth using these data suggest sluggish income and consumption growth over the next year.

2. Wage gains and higher expected inflation in Canada: The end of the easing cycle?

Yes, consumer price index (CPI) inflation last month ran at an ice-cold 0.4 per cent on a year-over-year basis, the slowest rate since the 2009 recession. Yes, even so-called “core” CPI inflation (a measure that excludes the most volatile components such as food and energy, which is not only a more reliable measure of the underlying inflation trend but is the ultimate guide for Bank of Canada interest rate policy) is a thin 1.1 per cent, dangerously close to the bottom of the bank’s inflation target range of 1 to 3 per cent.

And yes, all of this would typically spur the central bank to action to bring inflation back toward the happy middle of its target range – meaning, typically, rate cuts to lend a hand to a clearly sluggish economy. 

Yet the central bank continues to indicate that its next rate move, whenever that will be, will most assuredly be up, not down. It sees that there are a host of temporary factors that have kept consumer prices down – most recently a dip in fuel prices – that may not last. 

And, perhaps more strikingly, it sees the wage growth 

Statistics Canada reported Wednesday that Canada’s average weekly wages rose 3.1 per cent in March from a year earlier, matching the pace of February. Those numbers are the highest since last fall, and coming back to back, they make a solid case that wage inflation is gaining speed in this country, as economic growth picked up in the first quarter.

3. Property speculation in China.

In the latest effort to cool the property market, local governments were urged to implement a 20 percent personal income tax on capital gains from property sales, if a homeowner sells the property within five years of its purchase and the property is not the only one owned by the seller.

The authorities in major housing markets such as Beijing, Shanghai and Guangdong said in late March that they would implement the policy, which led to a sharp decline in secondhand home sales in those markets.

Although Li said that other local authorities are only expected to carry out the personal income tax policy on a "selective" basis, he pointed out that the country may tax the possession of multiple properties in the second half, if current policies continue to push up housing prices and worsen the market environment.

"The mismatch between supply and demand has been growing for years," Li said.