Monday, March 02, 2009

Deficit Based Personal Income Gain

Today's economic news were seemingly mixed-construction spending fell sharply, and this now includes nonresidential construction as well as residential, with nonresidential construction falling 4.3% versus 3% for residential construction. These numbers are worse than they look since we're talking about monthly changes. To calculate annualized changes you have to raise them by the power of twelve, which in case you wonder means -41% for nonresidential construction and -30.6% for residential construction. That number is certainly consistent with the extremely weak numbers from last week.

The ISM manufacturing index rose slightly, but that marginal increase was so small that it is within the statistical margin of error and it still shows significant contraction.

Seemingly contradicting this trend was the personal income number, with disposable real income rising as much as 1.5% from the previous month, and with real consumer spending rising as much as 0.4%. However, the consumer spending number is to a large extent based on retail sales numbers, and as I've previously pointed out, there are reasons to believe that the apparent gain reflected seasonal adjustment problems.

But what about the income number? Well, if you look at the specifics you can see that the $187 billion nominal gain in disposable personal income was entirely driven by an increase in the government deficit. Market based income fell in nominal terms and even more so in real terms as the price index rose 0.2%.

-For example, private wage and salary disbursments fell $12.9 billion, yet government wage and salary disbursments rose $10.2 billion.

-Personal transfer payment receipts jumped as much as $66.6 billion.

-Personal tax payments meanwhile fell $138.3 billion. Even excluding $5.1 billion increase in "contributions for government social insurance" (which strangely is treated as something different than taxes), that adds up to a net increase of $133.2 billion.

So, we have a increase in government wage and salary disbursments of $10.2 billion plus a $66.6 billion increase in transfer payments plus a $133.2 billion reduction in tax payments, for a total of $210 billion. Excluding that, disposable personal income fell by $23 billion in nominal terms, and roughly twice that in real terms.

Even that is less dramatic than many of the other numbers we've seen, but it is only normal for personal income to fall less than national income during slumps, as retained corporate earnings fall dramatically.


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