Monday, February 28, 2011
Personal Income And Outlays In January
Fortunately, BEA did not. The January report goes into the matter quite thoroughly:
The January change in disposable personal income (DPI) was affected by two large special factors. Reduced employee contributions for government social insurance, which reflected provisions of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, boosted personal income in January by reducing the employee social security contribution rates (employee contributions for government social insurance are a subtraction in the calculation of personal income). The January change in DPI was affected by the expiration of the Making Work Pay provisions of the American Recovery and Reinvestment Act of 2009, which boosted personal current taxes and reduced DPI (personal current taxes are a subtraction in the calculation of DPI). Excluding these two special factors, which are discussed more fully below, DPI increased $11.4 billion, or 0.1 percent, in January, following an increase of $48.5 billion, or 0.4 percent, in December.As I pointed out last year, the December tax deal boosted taxes on about 40% of earners, but sharply reduced taxes on higher earners. BEA calculates that absent these factors, the reported increase would have been about 0.1%. What is much harder to assess are state and local tax effects. BEA gets the data much later on those. From my sampling, it appears that state and local taxes and fees plus property taxes are still generally ratcheting up, so if anything, I think real incomes are a trifle overstated.
With these factors, current dollar personal income grew 1.0%. Current dollar disposable personal income (after taxes) grew 0.7%. Real dollar personal income grew 0.4%. (Higher income workers received more wages, but lower income workers received less because their federal income taxes were increased due to the expiration of the MWP tax credit.)
Current dollar personal consumption expenditures grew 0.2%, but real (chained) dollar PCE shrank at -0.1%. The BEA estimates:
Real PCE -- PCE adjusted to remove price changes -- decreased 0.1 percent in January, in contrast to an increase of 0.3 percent in December. Purchases of durable goods increased 0.3 percent, compared with an increase of 1.2 percent. Purchases of motor vehicles and parts accounted for most of the increase in durable goods in January and in December. Purchases of nondurable goods decreased 0.2 percent in January, in contrast to an increase of 0.1 percent in December. Purchases of services decreased 0.1 percent, in contrast to an increase of 0.2 percent.Again, cars carry the whole shebang. In a lot of ways this exemplifies the current situation. People who were doing pretty well (household incomes 60K - 75K) will do better this year. People who were doing quite well (household incomes 75-110K) are going to have a very good year. People who were at lower incomes are generally facing higher costs and net lower incomes on average.
There is also the unfortunate reality that many workers will exhaust their unemployment benefits this year, and jobs are not plentiful. There still seem to be 4-5 jobless for each job opening.
So now we wait. If job growth can continue, then the bottom echelon can start climbing out of the ditch. If job growth remains relatively weak, a growing proportion of the population is doomed to show up on the food stamp rolls. My guess is that too many low-margin businesses are going to be experiencing additional margin constraints to generate the type of job growth we need.
I also think we made a crucial mistake; giving people who already have very good incomes a very significant rise enables them to spend more, which dampens the underlying signal and produces more inflation. The pricing function is critical to prevent economic imbalances from developing. Futzing around with it in this way generally produces bad results.
In the spring I am expecting spending on nondurables and services to stabilize somewhat, but it depends on the inflation picture which is very volatile right now.
As a general rule in the US, when 60% of households are forced to cutback on spending for a long period of time because of income effects, a recession results. It doesn't happen quickly - the effect shows up in business spending first as they adapt - but it does happen pretty reliably. I think the business effect should be muted this time, because there have already been significant cutbacks in business spending, meaning that job effects will be muted. I do expect to see it show up in business spending and in compensation paid to workers. So I project a slow but more widespread income effect developing.
I assume that the FICA tax will be restored to normal levels in 2012, but the combination of the tax increase and the real drop in incomes for lower earners will produce something of an economic backlash.
Will Congress continue the FICA tax cut in 2012? It is an election year, and it is rare to see significant tax increases in an election year.
PS: The role of certain types of regulation in impairing small business growth is real, but still unaddressed. See, for example, Bill Frezza's excellent article on privately held business startups and Sarbanes-Oxley for a tale of extremely counter-productive regulation.
But life sucks when I've got Gary Numan soundtracks stuck in my head.
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