Real Disposable Income Down 4%, Reversing Strong Gains in December

The Bureau of Economic Analysis report on Personal Income and Outlays for January shows a 4% decline in real disposable income (the biggest decline in 20 years) following sharp gains in December. Personal Consumption Expenditures (PCE) eked out a .1% month-over-month gain.

Personal Income and Outlays, January 2013

Personal income decreased $505.5 billion, or 3.6 percent, and disposable personal income (DPI) decreased $491.4 billion, or 4.0 percent, in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $18.2 billion, or 0.2 percent.  In December, personal income increased $353.4 billion, or 2.6 percent, DPI increased $325.7 billion, or 2.7 percent, and PCE increased $14.8 billion, or 0.1 percent, based on revised estimates.

Real disposable income decreased 4.0 percent in January, in contrast to an increase of 2.7 percent in December.  Real PCE increased 0.1 percent, the same increase as in December.

Wages and Salaries

Private wage and salary disbursements decreased $44.8 billion in January, in contrast to an increase of $49.1 billion in December. Services-producing industries' payrolls decreased $41.5 billion, in contrast to an increase of $39.3 billion.

Personal Outlays and Personal Saving

Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- increased $22.0 billion in January, compared with an increase of $13.3 billion in December.  PCE increased $18.2 billion, compared with an increase of $14.8 billion.

Personal saving -- DPI less personal outlays -- was $283.9 billion in January, compared with $797.4 billion in December. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 2.4 percent in January, compared with 6.4 percent in December.

December to January Wild Swing Expected

The December to January swings were generally expected (at least they should have been). Corporations brought as many wages and bonuses forward as they could to avoid 2013 payroll tax hikes.

The surge in the December savings rate and the surge in December personal incomes were essentially a mirage.

Big Four Indicators

Dough Short at Advisor Perspectives does an interesting report every month on "Big Four" indicators: Industrial Production, Real Income Minus Transfer Payments, Employment, and Real Sales. "Real" means inflation adjusted.



click on chart for sharper image

Notes: 

1. The above chart shows Real Personal Income Minus Transfer Payments. That accounts for the difference between what Short reports and the BEA reports.
2. I added the dashed lines. Real disposable income is right about where it was a year ago, and not that far above where it was 25 months ago.

As per Short "The -4.7% decline in January essentially cancels the 1.4% rise in November and 3% rise in December. The January year-over-year number probably gives us a better sense of the economic reality: Personal Incomes Less Transfer Payments are essentially flat -- up a tiny 0.7%." 

Looking Ahead in 2013

Looking ahead, expect to see declines in real personal incomes on a year-over-year basis (an artifact of the end of the temporary 2% payroll tax cut). Sales tax hikes, especially in California (as a result of proposition 30), will take a further bite out of disposable income.

I think this will matter more than most economists have figured. 2% payroll cuts may not be much to upper income groups, but it will hit disproportionately hard on low-wage earners who ten to spend every cent they make.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com