Monthly Income and Spending Report

Yesterday's GDP report received a lot of attention, but today's report on personal income and spending for December is likely to receive little attention.  The information from the report was already incorporated into the GDP report, so in some ways it is old news (24 hours old).  However, there are additional details that provide insight into the state of the economy.  The headline numbers show that consumer spending (adjusted for inflation rose briskly in the fourth quarter, though at a more modest pace in December, as the quarter ended.  Meanwhile, income adjusted for inflation was pretty flat in the quarter, declining slightly in December.  If income is flat and spending increases, that means the savings rate fell.  It now stands at 3.9%, which is the lowest since 2008 (other than January 2013, which was distorted by income adjustments in anticipation of the tax hikes in 2013).  Optimists will say that consumers are gaining confidence and don't think they need to save as much while pessimists will claim that the recent increase in consumer spending is not being supported by gains in income.  My take is somewhat in between.  The overall pace of consumer spending is likely to increase somewhat compared to recent years, but not back to the rate of the good old days.  For many households, access to credit is limited and future increases in spending are likely to be constrained by increases in income, which are likely to remain modest (though somewhat higher than in recent years).

On an unrelated note, one of the biggest concerns facing financial markets in recent weeks is the state of emerging markets.  I may post some comments soon about it, but in the mean time I'll refer you to comments from economists from Wells Fargo, which I think are pretty much on target.

Recent Trends in Income for Florida and Orlando

Last week, the Bureau of Economic Analysis (BEA) released the latest estimates for state and metropolitan personal income (overall and per capita; both figures in real terms; i.e., adjusted for inflation).  I exchanged a series of emails with a reporter from the Orlando Sentinel, but only a very small portion was included in the story, so I decided to include more of the details in this post.

After declining by nearly 7% in 2009, real personal income in Florida is recovering (up 3.7% in 2010 and 2.2% in 2011, the latest year for which data are available). As of 2011, it was still below where it had been in 2007. Likewise, real personal income per capita (i.e., real personal income divided by population, not the same as income per worker) is slowly recovering from a steep decline in 2009 (down 7.5% in 2009, up 2.7% and 1% in 2010 and 2011, respectively). As of 2011, it was still down just over 5% from 2007. Inflation in Florida was slightly lower than the US as a whole, averaging 1.6% from 2007-2011 compared to 1.9% for the US.

The performance of Metro Orlando mirrored that of the state as real personal income rose 3.4% and 2.7% in 2010 and 2011, respectively, while real personal income per capita rose by 2.1% and 1.2%. The ratio of real personal income per capita in Orlando compared to the nation as a whole remained steady from 2009-2011 at about 87%.

How does Orlando compare to other metropolitan areas in Florida?  Here's a table comparing some of the metropolitan areas in Florida.

  Per capita Income by Metropolitan Area: overall and by Type for 2011

	Jacksonville	Miami	Orlando	Tampa
Personal income	$40,709	$43,072	$35,535	$39,261
Personal income from earnings from work by place of residence	$25,837	$24,543	$22,969	$22,201
Dividends, Interest, and Rent	$7,712	$10,601	$5,695	$8,810
Current Transfers	$7,160	$7,928	$6,872	$8,249

note: add rows 2-4 to get row 1; data are not inflation adjusted

The headline number shows Orlando lagging behind other metro areas, but the reason is somewhat surprising.  While earnings explain some of the underperformance, the major reason is weakness in dividends, interest, and rental income.  For example, while earnings per capita are higher in Orlando than Tampa, personal income per capita is 10% higher in Tampa due to higher dividends/interest/rent and higher transfer payments.  Earnings in Orlando also lag behind Jacksonville and Miami, but once again, the other forms of income, particularly dividend/interest/rent, play a more significant role.

What explains the relatively low level of dividends/interest/rent in Orlando?  One possible reason is a smaller amount of wealth due in part to a younger population.  The median age in Orlando is 33 compared to 39 in Miami and 35 in both Jacksonville and Tampa (different sources provide slightly different estimates).  Other factors also play a role, but that's a subject for another day.

What are the key takeaways?  Income in Florida is slowly recovered from the damage suffered during the Great Recession.  Also, differences in per capita income reflect not only differences in earnings but also in unearned income, including income from wealth and government transfer payments.

A Look at the Past Week's Economic Reports

The government released several economic reports this past week, including a revision of fourth quarter GDP and personal income/spending for January.  The headline numbers show that, instead of shrinking by 0.1% in the fourth quarter, the economy grew by 0.1%.  Personal income declined by 3.6% in January, the worst month in 20 years, after rising by 2.6% in December.  What did we learn from these reports?  Not too much.

The GDP report contained minor revisions and still reflect an economy that is growing at a modest rate (the private sector continues to grow at close to a 2% rate, which is better than 0%, but nothing to brag about).

The personal income/spending report reflects the impact of the anticipation and reality of the tax changes.  Those who could shifted income into December 2012 to avoid the anticipated tax hikes, resulting in a surge in dividends and bonuses in December and a subsquent decline in January.  When was the last time the US saw such a shifting in income?  In the early 1990s after the election of President Clinton, who promised to increase taxes on the rich during the 1992 campaign; the result was a surge in income in December 1992 to avoid the higher taxes and decline in January 1993 (so that's why this January was the largest decline in 20 years).

More importantly, consumer spending, adjusted for inflation rose by 0.1% in both December and January, reflecting a slowdown from the Fall of 2012.  The savings rate, which rose in December due to the temporary surge in income, declined to 2.4% in January, the lowest since November 2007 (right before the start of the recession).  Given the conisderable noise in the data, it's important to watch how things unfold in the coming months.

What are the key takeaways?  The economy was sluggish as 2012 came to an end and consumer spending continues to move forward, but at a slow rate.  It's still a little too early to tell how much of a hit consumer spending will take from the payroll tax hike.  Early evidence indicates that low and moderate income consumers are struggling, which should contribute to a sluggish economy in the first half of 2013.  Though not part of this post, it should be noted that housing is now the strongest part of the US economy (growing at a double-digit rate over the last year), helping to offset weakness in consumer spending and reductions in government spending.

This Week's Econonomic Update

There were a few key reports about the economy this week.  Economic growth for the Spring was revised down to 1.3% as both consumer and business spending grew more slowly compared to previous periods.  After contributing 2.5% to economic growth at the end of 2011, inventories have been a drag on growth in the first two quarters of 2012, which is not bad news.  Companies probably found themselves with too much inventory and now are making adjustments to get back in line with consumer spending.  Speaking about consumer spending, it has risen by 1.9% over the last year, contributing to the sluggishness of the recovery.  Over that same period, inflation as measured by the PCE deflator (average price of consumer goods and services in GDP) rose by 1.6%.

On Friday, there was another report about the state of the consumer (updated for August 2012).  Real personal income (real means adjusted for inflation) declined by 0.1% in August while real consumer spending rose by 0.1%.  As a result, the savings rate declined to 3.7% (down from 4.1% in July).  Consumer spending is on pace to grow by about 2% for the third quarter, slightly faster than the Spring.  Meanwhile, consumer prices have risen by 1.5% since August 2011 while core consumer inflation is 1.6%.

Add it up and you still get a sluggish economy with below-average inflation.  The next big economic report is this Friday's report on the job market.  Currently, the consensus is for just over 100,000 jobs created with little change in the unemployment rate.