September Personal Income Report: Curious, And Curiouser

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by: Trading Places Research

Summary

This was a strange report with worrying negative trends and anomalies.

The collapse of Proprietors' Income.

Consumption, Interest Payments and Savings are going in the wrong directions.

Farmers are taking it on the chin.

Wednesday, October 31, 2018

California, USA

Source: John Tenniel, Wikimedia Commons

"Curiouser and curiouser!” Cried Alice

Introduction: Weirder Than It Looks

With Consumer Confidence at sky high levels, I was expecting better. September’s Personal Income Report was a bit flaccid on the headline number of +20 bps from August, but digging down into the numbers, we find some worrying trends and anomalies beyond the headline number.

One of the big drivers here was the collapse of Proprietors’ Income which is the many pass-through businesses much discussed in 2017. If this is just statistical noise, and it recovers in the next report, it will be less troubling, so we will have to wait.

Overall though, if you read my Market Outlook, you know I am expecting a blowout Christmas season fueled by high Consumer Confidence, but this report makes me begin to doubt that. This is only one month, so watch and wait.

Wages: Government Employment Driving Limp Growth

First let’s look at the headline wage numbers. These are growth rates from the previous month.

Mar

Apr

May

Jun

July

Aug

Sep

Personal Income

0.40%

0.30%

0.35%

0.40%

0.32%

0.38%

0.20%

Wages/Salaries

0.36%

0.35%

0.30%

0.40%

0.32%

0.44%

0.22%

Private Ind

0.38%

0.38%

0.31%

0.42%

0.35%

0.47%

0.22%

Gov’t

0.09%

0.17%

0.27%

0.41%

0.15%

0.22%

0.33%

As you can see, everything moved in the wrong direction this month. Wage growth is the softest it’s been this year, and much of the growth is coming from government employment. The continued growth in government income jibes with my analysis of the Q3 Preliminary GDP Report, which saw the government's contributions to GDP growth increasing over time. This has been driven mostly by state and local budgets, but also the defense budget.

Another way I like to look at headline growth is to see what each subcategory’s contribution to that growth is. This gives you a better look at what’s at the wheel.

Mar

Apr

May

Jun

July

Aug

Sep

Personal Income

100%

100%

100%

100%

100%

100%

100%

Wages/Salaries

48.68%

64.13%

44.14%

52.77%

54.17%

62.69%

54.90%

Private Ind

46.78%

59.65%

38.11%

44.82%

50.27%

58.06%

42.30%

Gov’t

1.75%

4.48%

6.03%

7.94%

3.73%

4.63%

12.89%

So, relative to Personal Income, wages are off the April and August highs, but not so bad overall at around 55% of Personal Income. But we can see that the growth of government payrolls is what is keeping it buoyed, and private wages are coming in limp.

Digging deeper on the Private Industry subcategory, we can see where the problems are. Remember this is subcategory monthly growth as a percentage of total Personal Income growth.

Mar

Apr

May

Jun

July

Aug

Sep

Private Ind

46.78%

59.65%

38.11%

44.82%

50.27%

58.06%

42.30%

Goods

5.85%

24.76%

(3.09%)

10.78%

9.77%

6.42%

10.36%

Manufact.

3.22%

14.62%

(9.77%)

7.94%

5.33%

1.34%

(1.12%)

Services

41.08%

34.89%

41.21%

33.90%

40.67%

51.64%

31.93%

Despite a recent GDP print where household services soared, Services wages came in limp, only growing at 19 bps, a low in this Personal Income report (8-month window). Additionally, you see the red there on manufacturing, which grew at -4 bps in September.

Proprietors’ Income Craters

In addition to limp wage growth, the big story in this report is that Proprietors’ Income cratered in the month. To put this in context, it is only 9% of Personal Income, but pulled 7 bps out of growth for the month. If Proprietors’ Income had just remained flat in September, Personal Income would have grown at 0.27% instead of 0.20% and wouldn’t have looked so bad on the headline.

What’s driving this? Let’s start by looking at the monthly growth rates.

Mar

Apr

May

Jun

July

Aug

Sep

Proprietors’ Inc

0.54%

(0.01%)

0.59%

0.52%

0.27%

0.34%

(0.82%)

Farm

2.27%

1.39%

1.37%

1.35%

(11.47%)

(12.65%)

(14.83%)

Non-Farm

0.51%

(0.05%)

0.57%

0.50%

0.55%

0.62%

(0.56%)

Farm income has been cratering since July, but it has been buoyed by Non-Farm, which is a much bigger line-item. But in September, it was also down 56 bps. Looking at the subcategory’s monthly growth as a percentage of total Personal Income growth is revealing. Remember, Proprietors’ Income is only 9% of all Personal income and Farm Income is only 0.14% of Personal Income.

Mar

Apr

May

Jun

July

Aug

Sep

Prop. Inc.

12.28%

(0.39%)

14.98%

11.63%

7.46%

8.06%

(36.41%)

Farm

1.17%

0.97%

0.81%

0.71%

(7.64%)

(6.27%)

(12.04%)

Non Farm

11.40%

(1.56%)

14.17%

10.92%

15.10%

14.33%

(24.37%)

For such a small portion of Personal Income, these are some pretty large numbers. So the first conclusion is that Non-Farm Proprietors’ Income has an outsized effect on Income growth and is an important subcategory to keep an eye on, despite its relatively small size.

The second conclusion is that farmers’ incomes are getting killed by tariffs and retaliation. I mean, holy smokes, 3 terrible months in a row now.

But that only 9% of the Personal Income can pull out 36% of the month’s growth leads me to believe this is maybe some statistical noise. We will see where the next report takes us.

Rental, Interest and Dividend Income Becoming Too Important

Source: David Shankbone, Wikimedia Commons

Who among you is going to tell Jimmy the rent is not too damn high?

The rent, as they say, is too damn high. I include Interest and Dividend Income here, as we can think of them as rents on capital. As we will see, income on rents is becoming an outsized driver of Income growth. First, the monthly growth numbers.

Mar

Apr

May

Jun

July

Aug

Sep

Rental Income

0.67%

(0.16%)

0.17%

0.38%

0.59%

0.78%

0.94%

Int/Div

0.24%

0.18%

0.67%

0.46%

0.46%

0.18%

0.10%

The Rental Income jibes with the Q3 GDP report, which showed housing continuing to eat up national income. After a big surge, Interest and Dividends have come back to earth, but Rental Income has continued to grow at increasing rates. Let’s see what percentage of the topline can be attributed to incomes on rents.

Mar

Apr

May

Jun

July

Aug

Sep

Rental Income

7.31%

(2.34%)

2.12%

4.11%

7.99%

8.81%

20.17%

Int/Div

9.65%

9.75%

29.64%

17.87%

8.70%

4.33%

10.36%

Total Income From Rents

16.96%

7.41%

31.76%

21.98%

16.69%

13.14%

30.53%

Like with Proprietors’ Income, income on rents had an outsized effect on to the topline. Let’s hope it’s more statistical noise, because otherwise this is a worrying trend, indicating payments to property and capital are outpacing payments to labor.

Government Social Benefits Anomalies

Here again we have a strange one-month shift that we will have to wait and see if it is a real trend or just a blip. First, the growth rates:

Mar

Apr

May

Jun

July

Aug

Sep

Social Benefits

0.51%

0.45%

0.14%

0.29%

0.40%

0.36%

0.55%

SS

0.96%

0.00%

0.19%

0.41%

0.23%

0.41%

0.00%

Medicare

0.43%

0.52%

0.57%

0.64%

0.70%

0.76%

0.82%

Medicaid

0.71%

0.81%

0.68%

0.43%

0.43%

0.28%

0.13%

Unemploy.

(1.82%)

(2.59%)

(4.56%)

0.00%

0.80%

(1.98%)

(2.82%)

Vets

(0.56%)

4.83%

(2.80%)

(1.95%)

1.80%

0.74%

6.56%

Other

(0.15%)

(0.04%)

(0.31%)

(0.13%)

(0.08%)

(0.25%)

0.61%

So there are two trends and two outliers. The trends are that Medicaid growth has slowed considerably since March and at the same time Medicare (a much bigger line-item) growth has accelerated.

The first outlier is Veteran’s Benefits which skyrocketed this month and maybe more statistical noise. The Other subcategory also saw a huge anomalous rise. Let’s see what the percentage of the topline can be attributed to Social Benefits to see the outsized effect that Veteran’s Benefits and Medicare had.

Mar

Apr

May

Jun

July

Aug

Sep

Social Benefits

21.35%

25.34%

6.84%

12.06%

20.60%

15.67%

45.10%

SS

13.45%

0.78%

2.39%

5.67%

3.91%

5.97%

0.00%

Medicare

4.53%

7.21%

6.68%

6.52%

9.06%

8.36%

17.09%

Medicaid

6.14%

9.36%

6.68%

3.69%

4.62%

2.54%

2.24%

Unemploy

(0.73%)

(1.36%)

(1.95%)

0.00%

0.36%

(0.75%)

(1.96%)

Vets

(0.88%)

9.94%

(5.05%)

(2.98%)

3.37%

1.19%

19.89%

Other

(1.02%)

(0.39%)

(2.44%)

(0.85%)

(0.71%)

(1.79%)

8.12%

So we can see that September Social Benefits numbers are outliers generally. 45% of the month’s Income growth came from Social Benefits. This was driven by Medicare, Other, and the huge spike in Vets’ Benefits. I don’t know what any of this means except to contribute to the general strangeness of the report.

Consumption and Savings Going In The Wrong Directions

Disposable Personal Income has remained remarkably steady at 88.3% of Personal Income. So what are Americans doing with their (slowly) increasing income? It may not surprise you that the short answer is paying too much interest and not saving enough. First let’s look at the monthly growth rates on the consumption side.

Mar

Apr

May

Jun

July

Aug

Sep

Personal Outlays

0.61%

0.56%

0.46%

0.51%

0.48%

0.48%

0.40%

Consumption

0.62%

0.55%

0.55%

0.44%

0.47%

0.46%

0.38%

Goods

0.68%

0.64%

0.84%

0.04%

0.57%

0.34%

0.63%

Services

0.59%

0.51%

0.41%

0.62%

0.42%

0.52%

0.26%

Interest

0.57%

1.52%

1.52%

1.36%

1.34%

1.32%

2.08%

Personal Outlays and Consumption growth have been trending down since at least March. I include the Goods and Services subcategories, just because of the highly anomalous low growth in Services. Though it matches this report’s unusually low Services Income growth, the Q3 GDP report told a very different story with Household Services dominating the report. We’ll have to wait for next month to see if this is a statistical blip or not.

But Interest payments are the star here. Let’s watch its growth as a percentage of Personal Outlays growth

Mar

Apr

May

Jun

July

Aug

Sep

Personal Outlays

100%

100%

100%

100%

100%

100%

100%

Consumption

97.57%

93.16%

93.55%

91.79%

89.47%

92.84%

91.54%

Interest

2.08%

5.97%

6.08%

7.45%

6.16%

6.45%

7.77%

This is likely credit cards maxing out, as mortgages are tallied as an expense in Rental Income.

The Savings side is similarly ugly. The Saving Rate here is Personal Savings as a percentage of Personal Disposable Income.

Mar

Apr

May

Jun

July

Aug

Sep

Savings Rate

7.2%

6.9%

6.8%

6.7%

6.5%

6.4%

6.2%

I think you see the trend. Not much else to say about it, except if you want to know where our trade deficit comes from, there you go.

September Income Report Bullets

Too long? Didn’t read? Handy bullets to impress your friends (if your friends are econ geeks):

  • Some continued signs of weakness in the report, and some new ones.
  • Also some strange, anomalous results. We will have to wait for next month to see how those play out.
  • Wage growth is soft, and is being driven by rising government budgets, not private enterprise.
  • Manufacturing Wages growth continues its slide from spring highs.
  • Services Wages saw an unexpected slide in growth rate, which contradicts the evidence of the Q3 GDP Report.
  • Proprietors’ Income cratered this month. A statistical blip? We’ll see.
  • Farmers are getting hammered by trade wars. Badly.
  • Income from rents on property and capital relative to labor are becoming too important to Income growth.
  • Government Benefits had an anomalous month, driven by the continued rise in Medicare growth, but also very large month-to-month jumps in Vet Benefits and “Other”.
  • Consumption growth is slowing, in contradiction to the evidence of the Q3 GDP print.
  • Like with Services Income, Services Consumption took it on the chin, unexpectedly.
  • Interest payments are eating up more and more of US Personal Outlays.
  • The Savings Rate continues to decline.

Conclusions: Finding Meaning in a Jackson Pollack

Source: Metropolitan Museum of Art

I see 5% sustained growth, 0% inflation, and 0.1% unemployment well into the next decade. What do you see?

REPEATING MY CAVEAT: This is only one month.

I wasn’t even expecting to do an article on this report, but when I saw the headline number come in soft, I wanted to know why. As you see with the bullets above, the trends are all bad, and so are all the anomalous results as well. We’ll have to wait to see if those are just statistical noise or more bad news creeping into the report.

Finally, this is the first data set in a while that does not paint a clear picture of the US consumer as large and in charge. Rather, the US consumer seems to be getting stretched thin, with wage growth slowing, housing and health care spending accelerating, savings declining, and credit card balances high (if that’s what the growing Personal Interest Payments number means). Even though the very next day after this report was released we got another sky-high Consumer Confidence number, this is the first time I’ve had any doubts about my assessment that this Christmas will be an all-timer.

So rather than a clear picture, we have a Jackson Pollack, with paint splatters flying off in all directions. What you see in it may say more about your own biases than anything else.

Thanks for reading. Comments/insults welcome.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.