The Latest on Real Disposable Income Per Capita

March 28th, 2014

by Doug Short

With this morning's release of the February Personal Incomes and Outlays we can now take a closer look at "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 was significantly disrupted by the bizarre but predictable oscillation caused by 2012 year-end tax strategies in expectation of tax hikes in 2013.

The February nominal 0.29% month-over-month increase is encouraging, but after we adjust for inflation, the real MoM change is a smaller 0.21%. The year-over-year metrics are 2.27% nominal and 1.39% real.

The BEA uses the average dollar value in 2009 for inflation adjustment. 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 were doing on New Year's Eve at the turn of the millennium? Nominal disposable income is up 56.4% since then. But the real purchasing power of those dollars is up only 19.0%.

Here is a closer look at the real series since 2007. Real disposable incomes have been essentially flat for the past seven months.

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, five 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. I've highlighted a number of conspicuous tax planning blips as well as Microsoft's big dividend payout in 2004.

Suffice to say that we need this indicator to show continuing improvement in the months ahead.

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 -- along with the "easy money" financing of those years. 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.


For some additional commentaries on income and wages, see the following:

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