Yesterday, I posted my latest Big Four update featuring Monday's release of the January data Real Personal Income Less Transfer Payments. Now let's take a closer look at a somewhat different calculation of incomes: "Real" Disposable Personal Income Per Capita.
The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. The 0.12 percent nominal month-over-month increase is a return to a more normal trend after the oscillation during the November-to-February caused by year-end 2012 tax management strategies. The real MoM change was 0.25 percent, thanks to the disinflationary trend in the PCE price index used to deflate the series (more on that topic here).
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 were doing on New Year's Eve at the turn of the millennium? Nominal disposable income is up 51.0% since then. But the real purchasing power of those dollars is up only 14.9%.
Year-over-year disposable per-capita income is up 1.32%. But if we adjust for inflation, its only up 0.34%.
Here is a closer look at the real series since 2007.
Year-Over-Year DPI Per Capita
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.
Of the eight recessions since 1959, all started with a YoY number higher than the current 0.34%. However, the latest YoY is probably still skewed by the 2012 year-end tax strategy mentioned above. See the similar pattern in early 1993.
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.
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 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 a while. The red dots are the actual monthly data points with a callout for the most recent month. 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. An hour or so 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:
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.
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.