Wednesday, August 5, 2009

Personal Income Drops 1.3%

However -- there's a bit more to that headline.

Personal income in June fell back heavily due mostly to an end to a specific fiscal stimulus program. Meanwhile, spending and inflation were up. Personal income fell a sharp 1.3 percent after jumping a revised 1.3 percent in May. The drop was worse than the consensus forecast for a 1.1 percent decrease. June's fall was primarily due to a 5.9 percent fall in transfer payments which had spiked 8.0 percent in May from one-time payments under the American Recovery and Reinvestment Act of 2009. In the latest month, the wages and salaries component dropped 0.4 percent after dipping 0.1 percent in May. Consumer spending jumped 0.4 percent after edging up 0.1 percent in May. However, June's gain was price related from higher gasoline prices.

Over the last few months the only thing increasing personal income has been transfer payments from the government. But last month the end of a program led to a drop in income.

Here is a chart of personal income:

The chart better shows the big increase followed by the decrease. If also shows that we've had some severe swings over the last year -- again largely due to transfer payments. Considering the high rate of unemployment it's difficult to see salaries rising anytime soon. However, an extended period of decreasing income will lead to a drop in spending. And on that note, consider this chart of real PCEs:

On a year over year basis (the brown line) we're still moving horizontally which is good. However, we've had three decreases in the last five months on a real (inflation-adjusted) basis:

That is not good as it indicates there is still a fair amount of caution from consumers regarding spending.

Incomes won't increase until we deal with unemployment - and that is going to take awhile. As such, this area of of GDP is going to be touch and go for the foreseeable future.