Friday, May 27, 2005

According to the Associated Press, the US economy is coming up roses thanks to the bright sunshine of rising personal income.
Personal income rose in April at the fastest pace this year while people's spending slowed after a big jump in March, the government reported Friday.

The Commerce Department reported that incomes rose by 0.7 percent last month, reflecting a big jump in hiring by private sector businesses. The increase followed two 0.5 percent gains in February and March and was the strongest showing since a 4 percent jump in December that had been fueled by a big dividend payment from computer software giant Microsoft.

Consumer spending rose 0.6 percent in April, down from a big 0.9 percent jump in March. Analysts expect the economy to keep moving ahead at a good clip this year in part because they believe that rising employment will provide support for consumer spending.
Of course, it's always best to read the fine print rather than take economics writers at the news wires at face value. First of all, we should put these figures into real rather than nominal terms. While nominal personal income was indeed up 0.7% in April, real personal income was up a smaller 0.5%.

More importantly, real disposable personal income -- the kind that people can actually save (yes, I laughed myself there, too) or spend -- was up a much more humble 0.1%. And despite the supposed good news on consumption -- up a robust 0.6% in nominal terms but still below income gains -- real consumption growth in April was 0.2%. Thus, Americans continue to increase their consumption faster than they are increasing their disposable income.

If we really want some good news from this picture, look at the closing gap between real disposable income growth and real consumption growth. In February the gap was -0.2% (i.e. real disposable income grew 0.2% slower than real consumption) and in March a larger -0.4%, while in April it's shrunk to -0.1%.

But that kind of real news is rather weak tea if you're looking to trumpet the American economy.

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