Consumer income and spending eked out gains last month, although the increases aren’t enough to dispel doubts about the strength and staying power of economic growth. But initial jobless claims are still holding at the lowest levels in four years and so there’s still hope that the cyclical demons can be held off. The critical variable remains the labor market, and the ability of job growth to keep wages growing, which in turn will help keep the pace of income and spending from falling further. The good news is that wage growth rolls on, and so the case for optimism is far from hopeless. But energy prices rising and fears of a fresh round of Middle East turmoil, there’s precious little room for disappointment in the economic reports in the weeks ahead.

As for today’s news, let’s start by reviewing the latest weekly update for jobless claims. As the chart below shows, new fillings for unemployment benefits dipped slightly to a seasonally adjusted 351,000 last week. If you’re an optimist, that’s a sign that the recent declines are holding and the flat lining over the past three weeks is merely a pause that will soon give way to further declines. The alternative view is that the economic revival of late is slowing, and the inability of new claims to continue falling is a fresh sign of trouble ahead.

True, personal consumption expenditures (PCE) picked up last month, rising 2.0% vs. a roughly flat performance in December, the Bureau of Economic Analysis reports. But disposable personal income (DPI) growth slowed in January to a sluggish 0.1% gain, down substantially from 0.4% in the previous month.

More ominously, the year-over-year percentage changes for PCE and DPI continue to decelerate. As I’ve been discussing for months (here and here, for instance), the continued slowdown in these numbers is at the top of my list for things to worry about. Unfortunately, today’s update on consumer expenditures and income doesn’t remove these clouds on the macro horizon.

The hope is that the labor market will continue to grow and stop if not reverse the deterioration in income and spending. The recent fall in jobless claims suggests that this scenario has some statistical support. But the acid test will be payrolls growth on par with January’s encouraging report.
Meantime, optimists can point to the trend in private sector wages, which are still growing at 6%-plus on a year-over-year basis as of January, according to the latest numbers in today’s spending and income report from the government. This important contributor to economic growth (private wages comprise 51% of personal income) is a sign that the labor market is still healing and workers are earning more.

The problem is that there’s no room for weakness in job growth. Indeed, a dismal report for the February payrolls update would be deeply troubling at this stage. With gasoline prices rising and income and spending levels slowing, we may be facing another rough spring if the labor market stumbles. Next week’s update on nonfarm payrolls is more than a week away (scheduled for release on Friday, March 9). Between now and then, don’t be surprised if the crowd holds its collective breath.
Update: The original version of this post mistakenly said that the spending and income gains last month would dispel doubts about economic growth. That was a typo–I should have written that the gains aren’t strong enough to blow off worries. Sorry.