Thursday, June 30, 2005

Weak US income growth

That weak May retail sales report was no joke. As the BEA reports this morning, personal consumption expenditures fell in real terms for the second time this year.

While the slight fall in consumption expenditures is good news in the big picture of global economic adjustment, the failure of American disposable incomes to rise much at all -- and then to find their way into personal savings -- takes the shine off my contrarian interpretation.

Most disconcerting was the miniscule rise in nominal wages and salaries (+$8bn) in May, the weakest increase in a year. Total employee compensation also rose (+$11.3bn) the smallest amount since last June. These kinds of numbers are more characteristic of 2002 and the midst of the job recession than of an economy with "solid fundamentals".

Let's step back and take a wider look at real disposable personal income, the real "solid fundamental" of good growth. Over the last three months, DPI growth deflated by the PCE price index has been $16.4bn. Other recent three-month periods with weaker growth all have mitigating circumstances: the big dividend payout in December 2004 affecting March 2005; and changes in federal income tax withholding affecting October and November 2003. In fact, you have to go all the way back to the second half of 2002 (when real DPI fell five of six months) to find income growth as weak as what we have seen over the March-May 2005 period.

No surprise, then, that personal savings as a percentage of disposable personal income was 0.6% in May. If you want the optimistic scenario, remember that this is up from April's 0.5%. Over the last three months, the US personal savings rate is a pathetic 0.57%. Only the three months following 9/11 -- when the US went on its "shop to stop the terrorists" binge -- was lower, and then just barely (0.54%). But what is our excuse this time around?

Maybe we all really do belive that saving is just for chumps. As the insighful Daniel Akst skillfully argues (irony index: high), why play the ant with his taxed shelter and supplies when you can play the grasshopper and enjoy those luxurious foodstamps and the dignity of state-aid medical insurance?


At 12:38 AM, Anonymous Anonymous said...

Thanks for directing me to Akst whose writing I am not familar with, but this bit got me again:
" The government's system of measuring personal saving fails to capture changing asset values, mishandles pensions and has other shortcomings that cause it to understate actual savings, at least in the opinion of some economists."
The attack on the legitimacy of the stats is taking its toll on me.

The WH policy that America needs to save more is on a par with the policy that America needs/has a strong dollar. Nobody really knows how genuine the policy is nor how it is being implemented or even supported.
Such is the workings of this administration: ad hoc.

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