Marketwatch provides detail on a trend that will be important to keep an eye on:
Consumer spending is rising at tortoise’s pace for a very good reason: Incomes aren’t rising very much, especially after you adjust for higher prices.
Despite the good news on the jobs front over the past few months, personal incomes are barely keeping pace with inflation. Over the past six months, real disposable incomes are up just 0.6%, according to data released Thursday by the Commerce Department.
That’s slower than the population’s growth. On a per capita basis, inflation-adjusted, after-tax incomes are down 0.1% in the past year to $32,675 (measured in constant 2005 dollars).
The decline in disposable personal income is in large part due to the reversal of a few counter cyclical components that helped prop up the consumer during the 2008-09 downturn (outlined previously here). The issue is that these components that had benefited the consumer are now reversing and will slow any economic recovery.
The chart below outlines two of these components, personal transfer payments (social security, medicare, medicaid, unemployment insurance, etc...) and taxes. The average person now receives more than $7500 / year in these government transfers, while doling out less than $5000 / year in taxes.
The next chart puts these figures in relative terms. Personal transfers now account for just under 18% of all personal income, up from a 12-14% range the previous 26 years, while taxes paid are at just 11% of personal income.
As you can see above, these two components are now reversing as a percent of personal income. While this reversal is necessary, this impact on disposable personal income will directly impact the consumer's ability to spend and dampen any economic recovery.