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Economy in Brief

U.S. Personal Income Surge Lifts Savings Rate To Its Highest Since 1993
by Tom Moeller June 26, 2009

The economic recession continued to damp growth in wages last month, but "automatic stabilizers" kicked in to pick the slack. The result was a 1.4% jump in May personal income which was the largest monthly increase in a year. The rise owed to an 8.0% jump (12.2% y/y) in government payments which included a 3.5% (190.4% y/y) surge in unemployment insurance benefits and a 21.0% jump in "other" payments. As might be expected given the recession, these gains offset severe weakness in the income earned in the private sector. Wages & salaries slipped 0.1% (-1.1% y/y) for the eighth decline in the last nine months. In addition, the decline in interest rates took its toll on interest income which in May was off 5.5% y/y while the corporate sector paid fewer dividends (-5.2% y/y) as earnings fell.

Lower taxes added further to the income gains fueled by direct payments from the government. Tax payments were down nearly 20% since December. That lifted disposable personal income at a 10.8% annual rate so far this year and by 1.6% just during last month. Adjusted for inflation, real disposable income also has been quite firm and posted a 1.6% increase last month and is up at a 9.0% annual rate since December

With the recession, consumers have entered a cautious mode and they're letting the income gains rebuild their balance sheets. As a result the personal savings rate jumped again, last month to 6.9% which was the highest level since December of 1993.

Spending restraint was evidenced by the slight 0.3% rise in May personal consumption expenditures. That followed no change during April which was slightly better than a 0.1% decline reported last month. Adjusted for low inflation, May spending rose 0.2%. However, the 1.9% year-to-year retrenchment in real spending was near the fastest rate at which spending has ever been bulled back. The good news is that consumers seem to have grown tired of not spending. So far this year real personal consumption has risen at a 1.5% annual rate.

The consumption details may suggest, however, that the idea of a stabilization still may be a stretch. Real spending on motor vehicles seems to stabilizing and rose 2.4% last month (-16.4% y/y) and it's actually up at a 4.3% annual rate since December. Real spending on furniture & appliances also seems to be stabilizing though it's still down -5.6% y/y. Real spending on apparel made up for an April decline with a 0.2% increase (-7.4% y/y). Spending on services again was roughly unchanged (0.9% y/y).

Finally, all this spending restraint held back the PCE chain price index to a 0.1% uptick. The gain matched the rise in core prices and the annual rate of increase dropped to 1.8%. The latest increase in prices matched Consensus expectations.

The personal income & consumption figures are available in Haver's USECON and USNA databases.

Disposition of Personal Income (%)  May April Y/Y 2008 2007 2006
Personal Income 1.4 0.7 0.3 3.8 6.1 7.1
  Disposable Personal Income 1.6 1.3 0.2 4.6 5.5 6.4
Personal Consumption Expenditures 0.3 0.0 -1.8 3.6 5.5 5.9
Saving Rate 6.9 5.6 4.8 (May '08) 1.8 0.5 0.7
PCE Chain Price Index 0.1 0.1 0.1 3.3 2.6 2.8
  Less food & energy 0.1 0.3 1.8 2.2 2.2 2.3
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