Personal Incomes Offset By Rise In Food & Energy
The Bureau Of Economic Analysis reported that Personal Incomes in September advanced 0.4 percent from August which had increased by only 0.1 percent. More importantly, wages & salaries gained 0.3 percent tacking onto the 0.1 percent increase in August. Real disposable incomes, after adjusting for inflationary pressures, declined for the month by 0.02%. This was the second month of decline after falling by -0.28% in August. However, digging down into the report revealed some other interesting issues as they relate to the financial state of the average American.
The chart below shows the changes to personal income broken down by major subcategories. The most notable change from last month's report on personal incomes is that is that Government Social Benefits (welfare) jumped from a -1.8 billion dollar decrease in August to an increase of 12.6 billion dollars in September. This increase in social benefits accounted for more than 26% of the latest increase in personal incomes. Also, interesting is that personal dividend income rose less in September than August, presumably from stock liquidations, while personal interest income declined by 12.1 billion dollars again in September.
The surge in social benefits is concerning. In the latest data more than 585,000 individuals piled onto the disability rolls. Since July of 2010 the number of individuals claiming disability has risen by a whopping 2,776,000 individuals. What is most interesting about the recent trend of surging disability claims is that it began to occur almost exactly 2 years post the start of the financial crisis - which is when the those individuals depending saw their 99 weeks of extended unemployment insurance run out. It is either that or O.S.H.A. is completely failing at keeping the U.S. work place safe.
The dependency on government support for personal income is not limited to just disability insurance claims. It runs the entire gamut of the social welfare safety net. While the current Administration may tout that the economy is improving a quick look at the percentage of personal incomes that is comprised of social benefits tells a different story. In the latest month that ratio grew to 22.76% which is the highest level on record. The problem, of course, is that dependency on social welfare does not lead to sustainable economic prosperity since it is just a recycling of tax dollars.
However, it is important to note that wage and salary disbursements have risen since the beginning of the year which has contributed to the increase in personal incomes. However, the recent rise in wages has been very nascent and has come very late in the current economic expansion. Secondly, the rise in wages has been more than offset by a large surge in food and energy costs in recent months as shown in the chart below.
While the annualized rate of change in wage and salary disbursements rose again September continuing a steady trend since the beginning of this year, food and energy as a percentage of wages and salaries surged substantially more. The problem with this is that it grossly impacts the consumer. In the most recent report - personal incomes rose by 0.4% while consumer spending surged by 0.8%. Unfortunately, when spending outstrips income the difference has to come either from savings or credit. The chart below shows food and energy as a percentage of disposable personal incomes (DPI) versus the personal savings rate as a percentage of DPI. See the problem here? While core CPI remains very mild - rising food and energy costs at the headline have an immediate impact on the consumer's ability to make ends meet.
While personal consumption expenditures (PCE) may increase - if that increase in expenditures is primarily at the grocery store and the gas pump then the consumer is NOT buying MORE stuff. They are just buying the same amount of stuff at higher prices. In other words, the maintenance of the living standard becomes more costly. The chart below shows real, inflation adjusted, DPI versus PCE as a percentage of real DPI. The second panel is the personal savings rate as compared to PCE as a percentage of real DPI.
As you can see since 1980 consumption has expanded while disposable incomes have weakened along with economic prosperity which is something we discussed in detail last week. However, what is important is that rise in consumption at the expense of savings. Savings is what leads to productive investment and ultimately further economic expansion. With personal consumption expenditures rising due to increased inflationary pressures - the consumer's ability to expand their standard of living becomes constricted.
With real incomes declining in September the rise in spending is likely unsustainable. With the recession in Europe dragging on corporate profitability there is an increased likelihood that we will see unemployment picking up in the months ahead which will lead to weakness in incomes. While the current month's numbers are encouraging for the economic outlook in the short term - the long term ramifications of falling savings rates and stagnant wage growth will be continued sub-par economic growth.