Home Economic Trends Weak Growth for Real Personal Income Excluding Transfers – Robert Hughes

Weak Growth for Real Personal Income Excluding Transfers – Robert Hughes

Personal income rose 0.5 percent in February, according to data from the Bureau of Economic Analysis (see first chart). Personal income data over the past two years have been sharply distorted by lockdown policies which caused massive layoffs, and government stimulus programs that sent transfer payments skyrocketing. As distortions fade, personal income is returning to recent trend growth around 4.5 percent (see first chart).

Excluding personal transfer payments, personal income rose 0.7 percent in February and is up 9.0 percent over the latest 12-month period. It is also 2.2 percent above the 4.1 percent trend line (see first chart).

In real terms (adjusting for price changes), personal income excluding transfers rose 0.1 percent in February, leaving that measure up 2.5 percent for the year but 2.2 percent below the 2.5 percent trend line, and about equal to its September 2021 level (see first chart).

Weak growth for real personal income excluding transfers is a concern for the outlook for real consumer spending. Total personal consumption expenditures (PCE) rose 0.2 percent in February following a 2.7 percent jump in January. Among the components, durable goods fell 2.5 percent while nondurable-goods spending fell 0.1 percent but spending on services increased 0.9 percent for the month.

In real terms, PCE fell 0.4 percent as real durable goods spending fell 2.5 percent, real nondurable goods spending decreased 1.9 percent and real services spending rose 0.6 percent. Despite the fall, real PCE remains 1.8 percent above the 2.2 percent trend growth line (see second chart).

Personal savings rose 3.5 percent for February, but the level remains below the December 2019 level and about on par with the July 2019 level. The personal savings rate also ticked up in February, coming in at 6.3 percent of disposable income following rates of 6.1 in January and 8.4 in December, but it is below the December 2019 pre-pandemic rate of 7.3 percent and in line with December 2013 (see third chart).

The price indexes from the report on personal income and spending are the primary measures followed by the Federal Reserve. The total PCE price index increased 0.6 percent in February as durable-goods prices were flat, nondurable-goods prices increased 1.8 percent, and services prices increased 0.3 percent. The PCE price index excluding food and energy rose 0.4 percent for the month.

Over the past year, the PCE price index is up 6.4 percent, versus 6.0 percent in the prior month. The core PCE index, which excludes food and energy prices, is up 5.4 percent from a year ago. Both measures have been running well above 2 percent since April 2021.

Overall, ongoing disruptions to labor supply and production, shortages of materials, and logistics and transportation bottlenecks continue to exert upward pressure on prices. While cresting numbers of new Covid cases in late January and early February had the potential to support businesses’ efforts to improve supply chains and expand production, geopolitical turmoil surrounding the Russian invasion of Ukraine has had a dramatic impact on capital and commodity markets, launching a new wave of potential disruptions to businesses.  For consumers, rapidly rising prices are hurting real incomes and fraying confidence in the outlook for personal finances, suggesting a threat to real spending. The outlook for the economy has become highly uncertain and extreme caution is warranted.