In September, Personal Income fell very slightly, by less that 0.1% from August, as did Disposable Personal Income (or DPI, a.k.a. "after tax income").
However, with the "Cash for Clunkers" program over, Personal Consumption Expenditures (PCE, or consumer spending) fell by $47.2 billion from August or 0.5%, after increasing 1.4% from July to August. If one strips out inflation, real DPI fell 0.1% following a 0.2% decline in August, while real PCE was down 0.6% following a 1.0% rise in August (mostly due to "Cash for Clunkers").
Both the spending and income levels were right in line with consensus expectations. Over the last six months, personal income is up 0.7% while PCE was up 1.9%. The path of both income and spending was very erratic in the spring, but has since become much more stable.
If income is essentially flat, and spending is down, that means the savings rate is going up -- which in the long term is exactly what the economy needs, even though it hurts in the short term. Think of a rise in the savings rate as chemotherapy: it makes the economy sick in the short term, but kills the cancer that would destroy the economy in the long term.
In September the savings rate was 3.3%, up from 2.8%. That was also the average for the third quarter, which while down from 4.9% in the second quarter and 3.7% rate in the first quarter, is above the 2.7% average for all of 2008 and the 1.7% rate for all of 2007.
The graph below (from
http://www.calculatedriskblog.com/) shows the three month moving average of the savings rate back to 1959. While the savings rate has risen during the recession (as it normally does in economic downturns) it is still at a historically very low rate. To the extent that we do not have savings here domestically, we do not have internally generated capital for investment -- we either have to stop investing, or import it from abroad. Importing capital is the flip side of running a trade deficit.
If one looks at the sources of DPI the picture is not quite as good. The biggest -- and healthiest for the economy -- source of DPI is private wages and salaries. These fell by $11.2 billion in September, more than erasing a $10.1 billion gain in August.
The goods-producing sector (mostly manufacturing and construction) saw wages fall by $7.8 billion in September following a $6.3 billion decline in August. Of that, there was a $1.5 billion decline in manufacturing in September and a $4.1 billion decline in August.
By implication, wages from construction are still falling fast.
