Despite the high level of unemployment, wages have grown at a slow rate over the past two years — or at least they did. The Bureau of Economic Analysis reported this morning that personal income dropped in August for the first time since October 2009 — and spending flattened to the rate of inflation:
Personal income decreased $7.3 billion, or 0.1 percent, and disposable personal income (DPI) decreased $5.0 billion, or less than 0.1 percent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $22.7 billion, or 0.2 percent. In July, personal income increased $17.1 billion, or 0.1 percent, DPI increased $14.4 billion, or 0.1 percent, and PCE increased $76.6 billion, or 0.7 percent, based on revised estimates.
This is actually the second month in a row that real disposable personal income has dropped in chained 2005 dollars. After showing a 0.3% increase in June (preceded by two months of 0.0% stagnation), RDPI declined by 0.2% in July, and now 0.3% in August. The stagnant 0.0% in real PCE shown in the statement is actually a decline of less than 0.1%, the report states, the second decline in three months and the third decline in the last five. Consumers see their pocketbooks getting hit as businesses tighten compensation and are spending less as a result.
That’s the same conclusion reached by Reuters, which surprisingly expresses little surprise over the report:
Incomes fell for the first time in nearly two years in August and consumers dug into their savings to keep spending, according to a government report that showed the impact of the weak jobs market.
The Commerce Department said on Friday spending rose 0.2 percent, in line with economists’ expectations, after increasing 0.7 percent in July. When adjusted for inflation, however, spending was unchanged after rising 0.4 percent in July. …
Income slipped 0.1 percent, the first decline since October 2009, with private wages and salaries dropping $12.2 billion after increasing $23.8 billion in July.
Economists had expected income to edge up 0.1 percent.
“What you’re basically getting is a scene where consumers are losing momentum, they’re losing momentum on income and as a result of that they’re slowing down on spending,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities in New York.
Part of the bad news in the report is that consumer spending on goods dropped 0.2%, balanced by a 0.1% increase in services. Inflation calmed a bit in August, dropping to 0.2% after July’s 0.4% in the broader PCE index and also being cut in half in the core PCE index at 0.1% from 0.2% (excludes food and energy costs).
What does this mean? It explains the zero jobs growth figure for August, for one thing, which is why it didn’t come as a great surprise to anyone. Despite yesterday’s strange drop in weekly initial jobless claims, we can probably expect another disappointing monthly employment report next Friday. Consumers won’t spend if their income is getting squeezed, and businesses won’t expand if demand falls. It’s a recipe for continued stagnation at best, and as we close out the third quarter, it’s an indication that the economy is continuing to move in the wrong direction.