On Friday I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. But with Friday's avalanche of economic and market news, I decided to wait until the weekend to study the PCE data I find most interesting, namely, the monthly metrics on disposable income.
Let's take a close look at that PCE data to understand what the latest numbers are telling us about a key driver of the U.S. economy: "Real" Disposable Income Per Capita.What we discover is that, adjusted for inflation, per-capita disposable incomes have flatlined for the past two years and are currently at about the level first achieved in November of 2006.
The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000.
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 48.9% since then. But the real purchasing power of those dollars is up a mere 14.4%.
Real DPI per capita is at a level first attained in the Autumn of 2006 and remains about 0.5% below the level at the beginning the 2007-2009 recession. In fact, this metric of consumer well-being has essentially hovered around a flatline since May of 2010.
The mainstream media focuses on nominal disposable income with little or no attention to population or inflation adjustment. The "real" story in the latest PCE data is one of continued economic weakness.
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 preceding recessions to help us evaluate the recession risk for the current level.
As we can see, the current level is lower than the month that preceded every recession over the history of this data. There have been a few anomalous months when the YoY was lower without an associated recession. In most cases these anomalies are associated with one-time events, such as the Tax Reform Act of 1986 and Microsoft's one-time dividend payout, the spike in December 2004 mirrored by the YoY drop in December 2005.
Suffice to say that we need this indicator to show some solid improvement in the months ahead. An economy without real disposable income growth is heading for trouble. Unfortunately, the recent trend in unemployment data doesn't bode well for income growth.
The Consumption versus Savings Conflict
The US 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 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 saving rate has now slipped back to the 2002-2004 range.
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.