Friday, June 26, 2009

Personal Income & Spending: What Really Happened in May?

The above graphs track the same information over different time frames. The one on the right focuses on the last few years, highlighting the fact that income growth has stagnated.

Today's report announced that personal income increased $167.1 billion from the previous month. Consumption and savings increased as well: savings expanding at a much faster rate than spending. Please review the graph below.

However, the announcement that private wage & salary disbursements, goods producing industries' payrolls, and manufacturing payrolls decreased at a faster rate than the previous month caught me by surprise. In addition, service producing industries' payrolls and government wage & salary disbursements increased at a slower rate than the previous month. How can income expand without wages expanding?

Great question. The answer is........ "Personal Current Transfer Receipts." This figure increased by $162.6 billion in May, representing almost the entire gain in personal income. BEA's definition below:

Personal current transfer receipts

This component of personal income is payments to persons for which no current services are performed. It consists of payments to individuals and to nonprofit institutions by Federal, state, and local governments and by businesses.

Government payments to individuals includes retirement and disability insurance benefits, medical payments (mainly Medicare and Medicaid), income maintenance benefits, unemployment insurance benefits, veterans benefits, and Federal grants and loans to students. Government payments to nonprofit institutions excludes payments by the Federal Government for work under research and development contracts. Business payments to persons consists primarily of liability payments for personal injury and of corporate gifts to nonprofit institutions.

Please allow me to emphasize: "This component of personal income is payments to persons for which no current services are performed."


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