The pattern of two steps forward and one step back in the economic data took a big step back today with the release of the personal income and spending numbers. Personal income fell by 1.3% for the month, reversing a 1.3% increase in May, and a 0.2% gain in April. Disposable Personal income suffered a 1.3% decline following increases of 1.6% in May and 0.8% in April.
The reason for the swing was the timing of some of the Stimulus Act spending. In May, Social Security recipients got an extra one-time $250 payment, which increased personal transfer income by $166.1 billion and caused the May increase. In June, the absence of these one-time payments caused transfer income to fall by $131.7 billion. If one strips out this effect, personal income fell by 0.1% in June after being unchanged in May. Private wages fell by 28.6 billion in June following an $11.3 billion decline in May.
This was the 10th straight month where private wages were down. However, the rate of decline had slowed each month since January, when private wages and salaries fell $133.0 billion, so June also marked a reversal of that positive trend.
While personal income was falling, spending actually rose by 0.4%, following a 0.1% increase in May and a 0.1% decline in April. This caused the personal savings rate to fall to 4.6% from 6.2% in May. The increase in the personal savings rate, as seen in the graph below (from http://www.calculatedriskblog.com/) has been dramatic. This month's decline does not show up on the graph since it shows the 3-month average of the savings rate.
What is apparent is that the savings rate is still very low by historical standards, but well up from the extremely low levels of the last few years. With the massive destruction of wealth caused by the implosions of the housing market and the stock market (although that part has been partially reversed), people need to save to repair their balance sheets. I suspect that the savings rate is going to return to the 8 or 9% level that was the norm until the mid-1980’s and stay there for an extended period of time. With income down, and people spending a smaller percentage of their income, it means that overall demand is much lower.
If not for government automatic stabilizers and the Stimulus Bill, the overall trend in incomes would be much worse. Demographics are part of the reason that the savings rate is going up, since the Baby Boomers are in a scramble to save for retirement, which is right on the horizon for most of them. If they don’t save (or unless the housing market miraculously turns around and forms another bubble), large numbers of them will simply be unable to retire.
