Courtesy of Doug Short.
Earlier today I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. Now let’s take a look at a major component of today’s PCE report for an update on a key driver of the U.S. economy: “Real” Disposable Income Per Capita. Note that today’s report includes the BEA’s annual revisions, which impact the data since January 2009. As I’ll illustrate below, today’s extensive revisions, while mostly lowering the monthly data, give a more encouraging view of the trend in recent months.
Adjusted for inflation, per-capita disposable incomes have struggled for the past two years and are currently at about the level first achieved in December of 2007, the month the Great Recession began. In recent months, however, we’re seeing an encouraging reversal of the gradual decline during most of 2011. The interim trough was in November of 2011. Seven months later, real DPI per capita is up 1.81%. Month-over-month June real DPI per capita growth is up 0.27% and 0.96% year-over-year.
The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000.
The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let’s compare the nominal and real growth in per capita disposable income since 2000. Do you recall what you we’re doing on New Year’s Eve at the turn of the millennium? Nominal disposable income is up 49.9% since then. But the real purchasing power of those dollars is up a mere 15.3%.
The Impact of the BEA’s Latest Annual Revisions
Here is a closer look at the real series since 2006.
Now let’s overlay the pre-revision data in red.
As we readily see, the revisions lowered the data for the majority of the months since January 2009, changing what previously appeared as a relatively flat line since mid-2010 into a couple of more conspicuous undulations, especially from early 2011 to the present.
Year-Over-Year DPI Per Capita
Let’s take one more look at real DPI per capita, this time focusing on the year-over-year percent change since the beginning of this monthly series in 1959. I’ve highlighted the value for the months when recessions start to help us evaluate the recession risk for the current level. The impact of the changes is makes possible a bit more optimistic view of growth over the past seven months, as I mentioned at the opening.
Of the eight recessions since 1959, five started with a YoY number higher than today’s 0.96%. There have been a few anomalous months when the YoY was lower without an associated recession. In most cases these anomalies are associated with one-time events, such as the Tax Reform Act of 1986 and Microsoft’s one-time dividend payout, the spike in December 2004 mirrored by the YoY drop in December 2005.
Suffice to say that we need this indicator to show some solid improvement in the months ahead. An economy without real disposable income growth is heading for trouble.
The Consumption versus Savings Conflict
The US is a consumer-driven economy, as is evident from the 70-plus percent share of GDP held by Personal Consumption Expenditures.
But the money to support consumption has to come from somewhere, and a growth in real disposable income would be the best source. An alternative is to spend more by reducing savings.
As the chart above illustrates, the US savings rate had generally declined since the early 1980s, a trend no doubt supported by the psychology of the secular bull market from 1982 to 2000. After stabilizing for a couple of years following the Tech Crash, a new surge in asset-growth confidence from residential real estate was probably a factor in that trough in 2005. But in 2008 the Financial Crisis reversed the trend … for a while. The saving rate has now slipped back to the 2002-2004 range.
Can this low savings rate be maintained? Perhaps. However the odds of reductions in retirement entitlements in the years ahead may eventually discourage the trend toward saving less.
Note: My BEA data source is the National Income and Product Accounts (NIPA) Tables. Table 2.6 (Personal Income and Its Disposition, Monthly) is available here. A couple of hours after the BEA announcement, the St. Louis Federal Reserve posts the data in FRED (Federal Reserve Economic Data) with separate tables for the nominal and real per capita data: DPI Nominal and DPI in chained 2005 dollars.
