On Friday I posted my latest Big Four update which included last week's release of the June 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. This indicator has been significantly disrupted by the bizarre but not unexpected oscillation caused by 2012 year-end tax strategies in expectation of hikes in 2013.
The June nominal 0.21% month-over-month and 1.20% year-over-year numbers are getting us approximately back to the trend we saw near the end of last year prior to the forward pull of income and subsequent plunge to manage expected tax increases. However, the real MoM change was a negative 0.11 percent (more on that topic here).
As of the June historical revisions, the BEA uses the average dollar value in 2009 for inflation adjustment (formerly the 2005 dollar value). But the 2009 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 53.6% since then. But the real purchasing power of those dollars is up only 17.7%.
Year-over-year disposable per-capita income is up a meager 1.20%. But if we adjust for inflation, it has gone negative at -0.11%.
Here is a closer look at the real series since 2007.
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 reading. However, the volatility of Real DPI militates against putting very much emphasis on this metric. There are a number of other downward spikes in addition to the more conspicuous results of tax planning or Microsoft's big dividend payout in 2004.
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 US is a consumer-driven economy, as is evident from the 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. Given the long timeframe, I've used a log scale vertical axis to give a better view of the relative savings rate.
As the chart above illustrates, the US 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.
Here is a close-up of the 21st century, in which I've switched to a more familiar linear vertical axis. The addition of the callouts helps to explain the outlier months when a one-off surge in income momentarily showed up as savings. These are typically followed by a sharp drop-off in the savings rate in the following months as the one-off dollars are spent. Note that in this chart, I've used a 3-month moving average unlike the 12-month MA in the chart above, hence the greater volatility in the trend.
Can this low savings rate be maintained? Perhaps. However the probability of reductions in retirement entitlements in the years ahead may eventually discourage the trend toward saving less.