Disposable Income Isn’t Coming Back Anytime Soon

The phony GDP number keeps going up. The phony jobless rate keeps going down. Yet, disposable income goes nowhere at all.

Disposable income growth hasn’t kept up with broader economic expansion during the recovery, and it’s likely to remain under pressure for the foreseeable future.

Income after taxes, or disposable personal income, per capita has grown just 1.2% since the recovery began in June 2009 through the third quarter of this year. By contrast, inflation-adjusted gross domestic product per capita has increased 4.7% over the same period. To be sure, GDP fell further than income during the recession, but the path of recovery has been steadier for economic growth as a whole than individual income.

Consumers have managed to prop up growth in recent quarters. Increased spending accounted for more than a third of the 2.7% GDP growth recorded in the third quarter. Job gains have helped boost spending, but without advancing incomes it will be hard for consumption to drive economic growth.

Bear in mind that the graph shows aggregate disposable income, thus it lumps together the income of the rich, the income of the poor, and the income of those in the middle. Imagine what the curve would look like if you eliminated the top 5% of wage earners from the disposable income calculation.

According to the Bureau of Labor Statistics, millions of jobs have been added over the last 4 years. Yet, disposable income went nowhere. Why would we think the addition of another 1-2 million jobs this year will change the income situation? And if you look at the graph above, you'll see a bump in 2011 which was not sustained. Why did that occur?

Despite recent improvements, there’s still a lot of slack in the job market. Unemployment remains high, and employers don’t face as much pressure to raise wages with such a large pool of potential new workers.

Another factor likely to cut into disposable personal income in the New Year is higher taxes. Even if Congress manages to avoid the fiscal cliff, some taxes are likely to rise. Few lawmakers are discussing an extension of the payroll tax cut enacted for 2011 and 2012... When the payroll tax cut took effect in 2011, after-tax income saw a nice bump. The expiration will likely take a similar-sized bite.

Even if you think the "Fiscal Cliff" is so much hot air, it is almost guaranteed that somebody's taxes are going to up. The outcome is yet to be determined, but you will see the effect on disposable (after tax) income next year.

And what about inflation? The promise of the dreaded deflation—real declines in the prices of goods & services—was that the purchasing power of your dollar would go up, not down. Lance Roberts of StreetTalkLive points out that stagnant aggregate income during "the recovery" has lagged behind real changes in prices (by the official CPI).

While the economy is likely to continue to muddle along in the months ahead, largely due to the impact of $85 billion a month in liquidity from simultaneous QE programs, the strain on the average consumer will remain. This is due to the spread between the annual change in real wages and headline inflation [graph below].

This spread deteriorates purchasing power and drags on savings. Of course, you don't need to go much further than your own pocketbook to realize that your cost of living has increased markedly over the last few years even as reported inflation remains low.

The Federal Reserve has done everything it can to avoid the dreaded deflation, so we've had understated inflation. But if incomes don't rise, most Americans are up shit creek without a paddle. That's exactly what the graph above shows.

I have harped on the income numbers many times this year. This is obviously the last time I will do so in 2012. I pay close attention to this issue because it is the single biggest determinant of the economic future of the vast majority of Americans. (Rich Americans will still be rich even if they see some decreases in their disposable income.)

Everybody should be able to relate to this. Even if you don't know anything else, you still know how much money is coming in to your household, and, if you're on top of things, you're paying attention to how much is going out. This is just basic, right? That's what enables your day-to-day life. That's why the quantity of jobs created is not nearly as important as what those jobs pay.

Otherwise, for you, if you have no income, or your income falls below your need to spend on basic costs, you are fucked. And if you are currently fucked, getting all worked up about the unpromising future of our species Homo sapiens is a luxury you can't afford right now.

And that's why I pay attention to the trend in income. There's one helluva lot of bullshit for you to sort through in the good ole United States of America, but the historical and current income trends do not lie.

Comments

[Tessa@meetingconferencingtools]

I think that more people need to get involved in raising their income by entering an entrepreneurial stage. Many people have skills that can greatly benefit the world and they benefit too by putting more of that disposable income in their pockets. While I am not an advocate of a heavily consumerist lifestyle, it is nice to be able to enjoy the things we like and without money, that becomes difficult.

I think each of us has the God given power to shape our future. When things are bad, we can work to climb up and out of whatever situation we may be in. It's not easy.