Today’s economic report has good and bad news, and both are tempered by the effects of government intervention. The Commerce Department reports that personal income dropped 3.6% in January, the worst such monthly decline in exactly 20 years, but that consumer spending seems unaffected:
Personal income decreased $505.5 billion, or 3.6 percent, and disposable personal income (DPI) decreased $491.4 billion, or 4.0 percent, in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $18.2 billion, or 0.2 percent. In December, personal income increased $353.4 billion, or 2.6 percent, DPI increased $325.7 billion, or 2.7 percent, and PCE increased $14.8 billion, or 0.1 percent, based on revised estimates.
Real disposable income decreased 4.0 percent in January, in contrast to an increase of 2.7 percent in December. Real PCE increased 0.1 percent, the same increase as in December.
Before we pull this apart, let’s take a look at the AP’s analysis of the report:
The Commerce Department says consumer spending rose 0.2 percent in January. The gain was driven by an increase in spending on services, primarily reflecting higher heating bills. Spending on durable goods such as cars and non-durable goods such as clothing actually fell.
Income growth fell 3.6 percent in January, the biggest drop since January 1993. But it followed a hefty 2.6 percent rise in December. The December gain reflected a rush by companies to pay dividends and bonuses before income taxes increased on top earners.
Analysts surveyed by Reuters forecast income fell by 2.2 percent in January after rising 2.6 percent in December, while spending increased for a second consecutive month by 0.2 percent.
In other words, this was a big miss by Reuters’ analysts. The December increase in dividend payments was an artificial distortion of the market because of the fiscal-cliff standoff, which by that time seemed certain to raise tax rates. If that’s all it was, though, then Reuters’ expectation should have been right in the ballpark. Instead, income dropped by a significantly larger amount than it rose the previous month, which would indicate that real damage has been done by the change in economic policy, at least in the short term, as well as by the general lack of interest in economic growth by this administration in its progressive second-term agenda.
Consumer spending rose, however, which means that the potential for economic growth remains — if we tool our policies to encourage it. This also shows that the mini-apocalypse predicted because of the expiration of the payroll-tax holiday was nonsense. Personal consumption expenditures hit their highest mark (in annual rates, in chained 2005 dollars) in at least seven months, the length of time shown in the tables at the end of the report. By the same measure, January outpaced all four quarters of 2012. The supposed stimulus of the PTR was vaporware, as was the anti-stimulus of its expiration.
The real problem is still stagnant job creation caused by increasing government hostility toward capital and investment. Until we solve that, wages will not rise as labor remains a buyer’s market, and consumer spending won’t continue to improve for long in this environment.