Personal Income and Outlays... A Few Charts

The Economic Populist notes:

While disposable income increased by 0.4%, when adjusted for inflation, disposable income was actually a 0.2% increase.

Over the longer term and on a real per capita basis, March marked the third month in a row in which disposable personal income printed a negative year over year figure, which shows just how how weak the employment recovery has been.

On the flip side of the income / consumption equation, has been solid spending (both in nominal and real terms), as consumers have reduced their savings rate below 4% (the savings rate had moved above 6% during the beginning of the crisis).

One area of real consumption weakness... energy in real terms. I am no expert as to specifics of what is making up the decreased demand (clean technology, less people driving to work, more people taking public transportation, etc...), but I will say that demand does tend to decrease when the price of good or service quadruples like energy has in recent years.

Source: BEA

Taking a Look into Disposable Personal Income

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.

Source: BEA

Checking in on Personal Consumption

Reuters details

U.S. consumer spending was flat in December as households put the largest rise in income in nine months into their savings, potentially signaling slower consumption early in 2012. It was the weakest reading on spending since June, the Commerce Department said on Monday, and it followed two tepid gains in October and November.

The slow fourth quarter pushed the year over year real per capita spending (i.e. the amount of actual spending per person adjusted for inflation) down to 0.7%, the lowest reading since the crisis and the lowest reading since the early 1990's recession excluding the crisis.

Source: BEA

Something Sustainable

Over the past twelve months the rate of personal spending is up even though personal savings has risen (the obvious key is that personal wages have risen more than consumption).

Why is this such good news? It means that the consumer is rebuilding their personal balance sheets and is not causing a drag on the broader economy by reducing their spending.

Source: BEA

The Story of Income and Outlays

Let me walk through the below chart, which I think tells a very broad story of where we were, what happened during the crisis, and how we are back to our old path with regards to consumption, which makes up ~65-70% of the U.S. economy.

First, the details.

The chart below shows the year over change in items that make up personal income (compensation, transfer payments from the gov't, etc...) and items of expenditure we use that income for (consumption, taxes, etc...). A year over year increase in an income item is a positive, while a year over year increase in an expenditure item is a negative. Combined, we get an increase or decrease in savings (a negative savings amount does not mean savings is negative, just that the level of savings has decreased).



A 1000 foot explanation of what I see...

We spent too much relative to our incomes (due to the belief at the time that we could always tap into the "wealth" of our housing stock). This is seen in the chart through 2007 when savings growth turned negative (savings in absolute terms turned negative in this period as well).

The recession started when a slowing economy turned the pace of growth in compensation and receipt on assets to fall. This combined with an uptick in savings, meant consumption slowed and slowing growth (not a downturn in growth) is all it takes for a levered financial system to be strained.

The government attempted to help the shortfall in aggregate demand through a large spike in transfer payments (the $600 tax check in 2008 + unemployment benefits), but individuals chose to save a large portion of this increase, dampening the impact.

In late 2008, individuals dramatically decreased the pace of consumption to rebuild balance sheets and from all the uncertainty in the system. This caused the issues in the system to become magnified.

By mid to late 2009, due in part to transfer payments and reduced taxes (which caused disposable income to spike), and a bottoming in the financial markets, confidence began to slowly come back to individuals. By early 2010, we have once again been on our old spending path through the reduction of the increase in savings (which has topped out at ~5 to 6%, well below a lot of forecasts for savings rates to spike).

What happens now? While the bush tax cuts mean that taxes won't be a drag for at least another few years, transfer payments can no longer be relied on to increase disposable income. What we need now is the job market to bounce back and compensation to allow for spending.

Spending based on compensation? Go figure...

Source: BEA

Personal Income Rebound is Widespread

The chart below shows the year over year change in personal income across regions. In my opinion, the key is not to analyze which regions have done better (almost impossible with the below color scheme), but to see that ALL regions are rebounding (though still below old levels).

The issue is of course whether this is sustainable. The rebound was due to the government stepping in. The question is will the private sector bounce back before the goverment's support wanes.

Source: BEA

No Bounce in Income

Marketwatch details:

The savings rate for U.S. households fell to its lowest level in more than a year in September as incomes fell and spending increased, the Commerce Department said Monday. Personal income fell 0.1% in September. This is the largest decline since July 2009. Consumer spending rose 0.2%. Wall Street economists had expected a 0.2% increase in income and a 0.3% gain in spending.

Real disposable incomes fell 0.3% in September. Inflation moderated further in September. The personal consumption expenditure price rose 0.1% in September after a 0.2% gain in August. Inflation is up 1.4% in the past year. The core PCE was flat in September after rising 0.1% in August. Economists expected a 0.1% gain.

Source: BEA

Personal Income Breakdown

Yesterday, EconomPic detailed the slow growth in real personal income over the latest decade. Below we break down the contribution of real per capita disposable personal income over each of the past six decades.

Things to note:

1) Compensation grew by at least $2000 per capita in real terms each decade since 1960 (more than $4000 in the 90's), but only ~$350 in the 00's
2) 95% of real per capita personal income in the 00's were current transfer receipts (unemployment / welfare benefits) and a decline in taxes paid (wonder why our nation's debt has spiked?)

Source: BEA

Personal Income Slow to Rebound

Marketwatch details:

The savings rate for U.S. households fell in July to the lowest level in three months as spending outpaced income, the Commerce Department estimated Monday.

Consumer spending rose 0.4% in July while personal income increased 0.2%.

The report was mixed in terms of market expectations. Incomes rose less than the 0.3% expected, while spending was stronger than the 0.3% gain expected by economists surveyed by MarketWatch.

Real (inflation-adjusted) spending increased a seasonally adjusted 0.2% in July after a 0.1% gain in June, led by a sizable increase in purchases of durable goods.

Real after-tax incomes fell 0.1% in July, compared with a downwardly revised 0.1% gain in disposable incomes in June. This is the biggest decline since January.

The savings rate fell to 5.9% from 6.2% in June, which was the highest level since June 2009.

Source: BEA

Personal Income... A Matter of Wages

Marketwatch details:

The savings rate among U.S. households rose to the highest level in a year in June as income and spending were flat, the Commerce Department estimated Tuesday.

Income was unchanged in June, failing to show growth for the first month since July 2009. Consumer spending was also flat.

The June report was slightly weaker than expected and included downward revisions to figures from April and May.

Economists had been looking for June income to rise by 0.2%, with spending pegged to increase 0.1% in a MarketWatch survey.

Consumer spending, adjusted for inflation, rose 0.1%.

Taxes paid and unemployment benefits are no longer the huge positives for personal income they have been since the downturn began in December 2007 (growing and shrinking respectively). Now, it is all about wages which have been rather stagnant.



Source: BEA

More on Disposable Income

The chart below details the year over year change (in this case 12 months ended January of each year) in the categories that makes up disposable income, as a percent of disposable personal income. The goal is to clearly show the shift in the makeup in personal income growth over the past 10+ years.

As a reminder, personal current transfer receipts are (per the BEA):

Payments to persons for which no current services are performed. It consists of payments to individuals and to nonprofit institutions by Federal, state, and local governments and by businesses.

As a result, the chart shows that outside of rental income, the only growth in personal income has been due to reduced taxes paid and payments for no services performed.



Were the tax cuts and transfers needed? I would say probably given the crisis.

That said, don't be fooled into thinking the relative stability in disposable personal income is anything more than the public sector adding new liabilities just to maintain the status quo.

Source: BEA

Income Stagnant + Consumption Up = Savings Down

RTT News details:

the Commerce Department released a report on Monday showing that personal income increased by less than anticipated in the month of January, the report also showed a bigger than expected increase in personal spending.

The report showed that personal income edged up by 0.1 percent in January following a downwardly revised 0.3 percent increase in December. Economists had expected income to increase by 0.4 percent, matching the growth originally reported for the previous month.

At the same time, the Commerce Department said that personal spending rose by 0.5 percent in January after rising by an upwardly revised 0.3 percent in the previous month. The increase exceeded economist estimates for 0.4 percent growth.

Real personal income is now flat year over year, while real consumption is up. No surprise then that personal savings is once again trending down.



Source: BEA

State Personal Income Rebound

BEA details:

Although third-quarter personal income growth was slower than second-quarter growth (0.8 percent), its composition improved. Net earnings accounted for most of third-quarter growth in 33 states and for the nation. In contrast, transfer receipts accounted for most second-quarter personal income growth in 41 states.

Nationally, the industries making the largest contributions to third-quarter earnings growth were finance and health care. Smaller contributions of the other private service-producing industries were offset by declines in goods-producing industries. Although mining, construction, and manufacturing continued to decline in the third quarter, they subtracted less from third-quarter earnings growth than from second quarter growth. Federal civilian and military earnings grew in the third quarter, but state and local earnings declined, so that the net contribution of the government sector was zero.

Quarter over Quarter Improvement

Year over Year Shows How Far We Had Fallen

Source: BEA

Personal Income and Outlays Under Pressure

RTT News with details of the latest release:

With consumers saving more as a result of economic uncertainty, the Commerce Department released a report on Friday showing that personal spending decreased in September, while personal income came in nearly unchanged.

The report showed that personal spending fell by 0.5 percent in September following an upwardly revised 1.4 percent increase in August. The moderate pullback in personal spending came in line with the expectations of economists.

Additionally, the Commerce Department said that personal income decreased by less than 0.1 percent in September after edging up by a revised 0.1 percent in the previous month. Economists had expected income to be unchanged.

More important is longer term trends. Broken down below are the components of personal income over the past three years. The broad theme is decreased income, increased savings, yet relatively steady consumption.



Looking closer at the year over year changes in each, we do see a paradigm shift between consumption and savings (personal consumption down, personal savings up - though reader MAB points out total savings is WAY down due to the debt load taken out by the government), which has been partially eased by reduced taxes allowing consumers to spend more on the margin over the past year.



This is inclusive of the pulling of demand from the future into the latest quarter (i.e. consumption "should" have been much less) due to the cash for clunkers program.

The question is what happens now? More on that in a bit.

Source: BEA

Consumption Up in August, Expect a Decline in September

Peter Boockvar (via The Big Picture) with the latest on personal consumption:

August Personal Income rose 0.2%, 0.1% more than expected and July was revised up by 0.2%. Spending rose 1.3%, 0.2% higher than forecast and most of the gain in the durable goods category was due to the Clunker program. Durable goods purchases, which reflect auto’s, rose 5.3% vs a 1.3% gain in July.

Those personal consumption figures were from August, when auto sales (make that foreign auto sales) snapped back due to the cash for clunkers. How about September? The WSJ answers that question:

Consumer jitters and vehicle shortages returned September U.S. auto sales to depressed levels, as the jolt from the government-run "Cash for Clunkers" subsidy program proved to be short lived.

The closely watched annualized selling rate fell to 9.22 million in September from last month's 14.1 million rate, according to Autodata, an industry consultant.

"I've never seen a rollercoaster ride like this," Ken Czubay, vice president of U.S. sales and marketing at Ford Motor Co. (F) said in a conference call.

Car makers attributed the decline to the overall weak economy and the after-effects of the clunkers program that ended Aug. 24, which allowed consumers to trade in old vehicles for newer more fuel efficient ones.

And the chart (remember that the huge slide began last September, thus the year over year decline is off of an already low base).



Source: BEA / Autoblog

Income Down, Savings Up = Consumption Down = Stalled Economy

WSJ reports:

Without government support, personal income is under pressure as the U.S. workweek gets shorter. In a report showing the U.S. unemployment rate rose to 9.5% in June, the Labor Department said the average workweek for production and non-supervisory workers on private non-farm payrolls fell by six minutes to 33 hours -- the lowest since records began in 1964.

The bad job market is endangering a U.S. recovery. A key report last week said the economy slumped April through June by 1.0%, much less than over the winter. But the data showed consumer spending decelerated in the spring. Spending is a big part of the economy. While analysts foresee the economy rising in the current, third quarter, fear for jobs will likely keep wallets tight and hinder the expected growth the rest of the year.

The data Tuesday showed personal saving as a percentage of disposable personal income was 4.6% in June, the Commerce Department said. It was 6.2% in May, 4.7% in April, and 3.7% during March.

Below is a chart of personal vs. disposable personal income (notice the spike in disposable income from last years rebate check... didn't last for long).

Now, the money shot. Real personal consumption per capita vs. national savings.

Catch-22 alert. How do we get a recovery without the return of the consumer... how does the consumer return without a recovery?

Source: BEA

Update:

There seems to be some confusion (in my opinion) over this post over at Reddit. User Shenpen states (and has a lot of support from the Econ crowd) that:

This makes no sense. If savings are up, they are in the bank. If they are in the bank, they need to pay interest. They can only pay interest on it if they invest it. Investment creates demand for capital goods i.e. it simply diverts the jobs from making consumption goods to making capital goods.

True, in normal circumstances. Ignoring the practically zero cost of deposits, the issue lies when EVERYONE tries to save at the same time. Call it the "paradox of thrift". In a given moment it is in each participants best interest to save, but IF ALL SAVE AT THE SAME TIME then the overall income pie decreases as the economy slows (i.e. GDP decreases).

Thus while savings is rising as a percent of income, the overall level of income (thus savings) is actually decreasing. We can see this in the actual data. Savings as a percent of income has risen, but overall savings (i.e. investment within GDP) has fallen dramatically.

I will agree that this is one way out of the Catch-22. If investment towards capital goods (with actual use) does increase, then we don't necessarily need consumption to spring back for growth to return.

Personal Income Saved by Unemployment Insurance

WSJ reports:

The income of Americans soared in May because of the government's economic stimulus, leading them to increase spending modestly and boost the saving rate to the highest in 15 years.

Personal income rose at a seasonally adjusted rate of 1.4% compared to the month before, the Commerce Department said Friday. The jump reflected reduced taxes and increased social benefit payments unleashed by the stimulus package.

Up? Yes. Soared? No. Looking at year over year figures, personal income continues to show anemic (or in disposable personal income terms negative) growth.



Was stimulus the savior? Well, if you classify unemployment (and the extension of these benefits), then yes. The amount of unemployment benefits paid out has doubled in the past 12 months.

The chart below shows this more clearly. While personal income has stabilized, it has been due to unemployment benefits making up the shortfall in compensation.

They key is what happens now. Unless benefits are extended again (and soon), these figures will turn negative unless you believe the broader economy picks up. There already have been negative signs as the exhaustion rate (i.e. those no longer able to collect benefits) has increased in recent months.

Source: BEA

Personal Consumption Holding Steady

WSJ reports:

Americans spent at a slower rate in February as their income fell and they saved money at a historically elevated level to cushion against the recession. Personal consumption rose 0.2% compared to the month before, the Commerce Department said Friday. Spending had increased a revised 1.0% in January; originally, spending was seen up 0.6%.

Personal income in February fell at a seasonally adjusted rate of 0.2% compared to the month before. Income increased a revised 0.2% in January; originally, income for that month was seen 0.4% higher.

Personal saving as a percentage of disposable personal income was 4.2% in February, the Commerce Department said. It was 4.4% in January. The last time the saving rate exceeded 4.0% two straight months was August and September 1998, up 4.3% and 4.2%, respectively.

How is it possible to spend more, save more, all the while earning less? Taxes paid down and social benefits up...

Source: BEA

State Per Capita Incomes

The BEA reports:

The range of state growth rates was wide. The high end included oil producing states such as Alaska, Wyoming, Oklahoma, and Texas which benefitted from the rise in oil prices, which peaked in the first half of 2008. Annual employment levels in 2008 in these states exceeded their 2007 levels. At the other end, personal income growth was less than the 3.3 percent national inflation rate in 13 states in 2008. These states include Florida, Arizona, Michigan, and Nevada which had among the largest percentage declines in employment in 2008.

Per capita personal income (personal income divided by population) grew 2.9 percent nationally in 2008 down from 4.9 percent in 2007. Across states, per capita personal income growth rates ranged from 0.4 percent in Arizona (down from 1.7 percent) to 9.0 percent in North Dakota (down from 11.9 percent).

Change in Per Capita Personal Income by State (YoY)

Personal income declined nationally and in 41 states in the fourth quarter of 2008. The 0.2 percent national decline was the first since 1994Q1 and contrasts with a 0.2 percent increase in the third quarter. Personal consumption prices fell 1.3 percent in the fourth quarter of 2008, the largest quarterly decline ever.

The largest contributors (by industry) to the decline in personal income were the cyclically sensitive manufacturing and construction sectors as well as the trade sector, at both the wholesale and retail levels.

Change in Personal Income by State (QoQ)


Finally, for those interested in how your state stacks up in per capita personal income, have at it (gotta love those politician's raking it in).

Per Capita Personal Income by State


Source: BEA

Disposable Income Breakdown

A breakdown of those areas contributing to disposable income going back to 1948 is below. Compensation for employees and proprietors income (i.e. salaries) have decreased from well north of 80% to 70%, while personal income receipts on assets increased from less than 10% in 1948 to almost 20% in 2008 (i.e. owners of capital had been king).



And the area with the largest growth over the past 60 years? Personal current transfer receipts, which according to the BEA are:

Payments to persons for which no current services are performed. It consists of payments to individuals and to nonprofit institutions by Federal, state, and local governments and by businesses.

Expect this to grow dramatically in coming years... we're all socialist now!

Source: BEA

Update- an anonymous comment adds:

I think you're ignoring the possibility that much of this is demographic (Social Security and Medicaid). As you say, it will get worse (with the pickup in Boomer retirement).

Good point.