In September, Personal Income fell very slightly, by less that 0.1% from August, as did Disposable Personal Income (or DPI, a.k.a. “after tax income”).
However, with the “Cash for Clunkers” program over, Personal Consumption Expenditures (PCE, or consumer spending) fell by $47.2 billion from August or 0.5%, after increasing 1.4% from July to August. If one strips out inflation, real DPI fell 0.1% following a 0.2% decline in August, while real PCE was down 0.6% following a 1.0% rise in August (mostly due to “Cash for Clunkers”).
Both the spending and income levels were right in line with consensus expectations. Over the last six months, personal income is up 0.7% while PCE was up 1.9%. The path of both income and spending was very erratic in the spring, but has since become much more stable.
If income is essentially flat, and spending is down, that means the savings rate is going up — which in the long term is exactly what the economy needs, even though it hurts in the short term. Think of a rise in the savings rate as chemotherapy: it makes the economy sick in the short term, but kills the cancer that would destroy the economy in the long term.
In September the savings rate was 3.3%, up from 2.8%. That was also the average for the third quarter, which while down from 4.9% in the second quarter and 3.7% rate in the first quarter, is above the 2.7% average for all of 2008 and the 1.7% rate for all of 2007.
The graph below (from http://www.calculatedriskblog.com/) shows the three month moving average of the savings rate back to 1959. While the savings rate has risen during the recession (as it normally does in economic downturns) it is still at a historically very low rate. To the extent that we do not have savings here domestically, we do not have internally generated capital for investment — we either have to stop investing, or import it from abroad. Importing capital is the flip side of running a trade deficit.
If one looks at the sources of DPI the picture is not quite as good. The biggest — and healthiest for the economy — source of DPI is private wages and salaries. These fell by $11.2 billion in September, more than erasing a $10.1 billion gain in August.
The goods-producing sector (mostly manufacturing and construction) saw wages fall by $7.8 billion in September following a $6.3 billion decline in August. Of that, there was a $1.5 billion decline in manufacturing in September and a $4.1 billion decline in August.
By implication, wages from construction are still falling fast. Service sector wages fell by $3.4 billion in September after a very solid $16.4 billion increase in August. Government wages edged up by $0.2 billion following a $2.4 billion increase in August. Over the last six months, total wages are down by 0.5% and private wages are down by 1.0%. Total government wages (all levels) are up 1.3%.
If personal income is flat but wages are falling, where is the income coming from? Supplemental payments by employers for things like pensions are also essentially flat for the month, and are up just 0.4% over the last six months. Proprietors’ income was up only slightly for the month, but is up 1.2% over the last six months.
Part of the growth is coming from a relatively small area, rental income, which rose 1.9% for the month, and is up 13.9% over the last six months. Frankly, I find this to be shocking given the news of soaring vacancy rates and plunging rents on both commercial and residential rental properties. It is not due to personal income from financial assets.
Personal interest income fell 0.6% in September and is essentially flat over the last six months. Personal dividend income has been consistently ugly, falling for at lest seven straight months (that’s all that is presented in the release, and I have not gone back to check previous releases). Interest rates have been low, and companies have been cutting or eliminating dividends.
Historically, big banks like Citigroup (C) and Bank of America (BAC) were among the most generous dividend payers, but they should not be paying common dividends for a long time now. In September, dividend income fell by 1.3% and is down 12.5% over the last six months.
So if it’s not coming from wages or supplements, and it’s not coming from financial assets (and rental income is too small to make that big of a difference), where is the personal income coming from? Why, good old Uncle Sam. In September, transfer income like Social Security income and unemployment benefits rose by $17.3 billion or 0.8%, following a $9.3 billion or 0.5% increase in August. Over the last six months they are up by 6.4%. These six month increases are not annualized, so you can double them to get the annual rate (well, technically, convert the 6.4% to 1.064 and square it).
While rising income from Social Security and unemployment insurance does help keep the economy moving in the short run, it is hardly a healthy long-term situation.
The second graph is really frightening and comes from http://energyecon.blogspot.com/. It shows year-over-year change in total personal income minus government transfer payments by quarter going all the way back to 1949.
While I wish the data were presented on a log scale or was done in percentage changes (a $10 billion change in the 1950’s would be significant; today, not so much) this is really noteworthy. It has been almost unheard of for personal income from the private economy to fall year over year, let alone by a rate close to $600 billion. This data raises real questions about the sustainability of the 3.5% growth that we saw in the third quarter.
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