Filling the Trough
The Hungry Beast’s Rising Income
A particular bane of Macrosight’s existence is the attention paid to measures of consumer sentiment (expressed in these previous posts). Rather than trust what people say in response to surveys, this blog prefers to observe what consumers actually do. And by “observe,” I mean look at consumer spending data. What the data show is that what we do is spend, whether that is on YOLO-type stuff, or in general.
For example, while measures of sentiment are hitting “lows,” consumer spending increased by about 3.6 percent in May (on an annualized basis; as reported by the Bureau of Economic Analysis).1 On a year-over-year basis, consumer spending is up about 2.5 percent over the past year. I would be very surprised, too, if the consumer spending data for June and July, when the data do come out, show anything but the Hungry Beast enjoying some summer fun.
Feeding the Beast
Amidst the various headlines pushing the “concerned consumer” narrative, one might wonder how the Hungry Beast is maintaining its seemingly ceaseless appetite. Is it via excess borrowing? Probably not. From burning through savings? Not quite.
Rather, to paraphrase a former presidential adviser-turned-talking head, it’s our income, stupid!
Figure 1 displays three variables, nominal disposable income (meaning measured in current prices), real disposable income (income values adjusted for inflation), and the Fed’s preferred measure of prices, the personal consumption expenditures price index (the PCEPI) since the middle of 2009 (the end of the Great Recession).2
The top part of Figure 1 shows the income variables (measured in trillions of dollars on the left axis), while the bottom panel shows the price index (index values shown on the right axis). Some things to notice:
Nominal disposable income has steadily gone up, punctuated by the two large spikes in 2020 and 2021 (the respective stimulus programs of the Trump and Biden administrations).
The price index has steadily increased also, with a noticeable inflexion around or after 2020. The rise of the price index is well-known. The steady increase in our income is probably less well-known (or at least has gotten less attention than the increase in prices).
The real income series reveals something important also: in spite of the rise in prices, the Hungry Beast’s income has kept just ahead of inflation.
To augment those points, Table 1 shows the growth rates of these series over the past few years, with the average over 2009 to 2019 provided for historical comparison.
Some things to notice in this table:3
Since 2020, and so far in 2024, nominal income has increased at a higher average rate than the 10 to 11 years prior to the Covid-19 pandemic.
Average inflation has also been well-above average the past four years (again, this is well-known).
Real income has a more varied story:
i. After strong growth in 2020 and 2021 (thanks to the stimulus mostly), our income adjusted for inflation fell by 0.9 percent. That is not surprising given the average inflation of 5.3 percent that year (while nominal income increased by 4.3 percent). Prior to 2022, the last time real income averaged negative growth was 2013.
ii. Yet, in 2023 real income rebounded, increasing by 3.8 percent, thanks to strong nominal income growth and sub-3.0 rate of inflation. So far in 2024 the Hungry Beast’s real income has been less robust at 1.6 percent (and below the historical average). Nominal income is higher than in 2023 but so is PCEPI inflation.
iii. But, while lower than in 2023, positive 1.6 percent real income growth still implies our income is running ahead of inflation.
The last point is especially important. Stated in a different way: the average increase in our wages and salaries has been higher than the average increase in the prices of goods and services (as measured by the PCEPI). That may be hard to believe, but that is what the data reveal.4
So, while the media narrative seems to be that the American consumer is worrying more about the macroeconomy as of late, data on consumer spending and income suggest all is not as dire as that narrative suggests.
A Trough Divided?
Of course, like most of the macroeconomic statistics Macrosight likes to explore, disposable income is an aggregate statistic. While discovering that the Hungry Beast’s income has been growing faster than inflation is a welcome surprise, that tells us nothing about how those increases have been divided up among the millions of us that make up the collective Hungry Beast. Aggregate statistics do not tell us about the distribution of income, nor which households those increases in wages and salaries are benefitting. To discover that, we need to dive a bit deeper into the data. Fortunately, the BEA and the Bureau of Labor Statistics (BLS) provide such information, the exploration of which is on Macrosight’s agenda.
The month-to-month change equaled 0.3 percent, as shown here. I multiplied that by 12 for the simple annualized number of 3.6 percent.
The simple definition of disposable personal income provided by the BEA is as follows: “After-tax income. The amount that U.S. residents have left to spend or save after paying taxes is important not just to individuals but to the whole economy. The formula is simple: personal income minus personal current taxes.”
While I computed growth rate averages for the real income series separately from the nominal income and PCEPI series, an easy way to calculate a real growth rate is to use the formula: Real Rate = Nominal Rate - Inflation Rate. Macrosight made use of this type of formula in previous posts on the real versus nominal interest rate.
This inference is corroborated by data on employment costs and average hourly wages, as put out by the Bureau of Labor Statistics.