Real Disposable Income Per Capita: The Year-End Strategy in Spades

by: Doug Short

Earlier this morning, I posted my latest Big Four update featuring Real Personal Income Less Transfer Payments. Now let's take a closer look at a different calculation of incomes: "Real" Disposable Income Per Capita. The November and December data show a strong reversal of the contractionary pattern in the previous months. Unfortunately, the numbers for both months, and especially December, are heavily skewed by year-end tax planning strategies in advance of the expected expiration of the Bush tax cuts. In this morning's Personal Income And Outlays report, the Bureau of Economic Analysis explains:

Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments.
Click to enlarge

The downside, no pun intended, will be the inevitable plunge in early 2013 income data, which we'll see in the January data published in late February.

The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000.

Click to enlarge

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 55.5% since then. But the real purchasing power of those dollars is up only 18.9%, and both numbers will drop next month following the tax maneuvering described above.

Click to enlarge

Here is a closer look at the real series since 2007.

Click to enlarge

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.

Click to enlarge

Of the eight recessions since 1959, four started with a YoY number higher than the current 1.80%.

Suffice to say that we need this indicator to continue to show some solid improvement in the months ahead, after the oscillation from the year-end tax strategies. An economy without real disposable income growth is heading for trouble.

The Consumption Versus Savings Conflict

The U.S. is a consumer-driven economy, as is evident from the 70-plus percent share of GDP held by Personal Consumption Expenditures.

Click to enlarge

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.

Click to enlarge

As the chart above illustrates, the U.S. 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 awhile. The red dots are the actually monthly data points. They illustrate that the saving rate has been slipping back to the 2002-2004 range. The blue line is a 12-month moving average, which helps us understand the underlying trend of this rather volatile indicator.

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.

A Footnote On Annual Revisions

The DPI series is subject to monthly revisions and more substantial annual revisions each July. So we must take the latest data with a grain of salt. See, for example, the impact of the July 2012 annual revisions on our understanding of trends for this indicator.

Click to enlarge

As we readily see, the July 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.