Total personal income rose by $20.2 billion in September after falling by $7.1 billion in August. Personal Consumption Expenditures (PCE) rose by $68.7 billion on top of a $24.2 billion increase in August.
Looking a bit further back, over the last six months total personal income is up $99.2 billion while spending is up $218.1 billion. That is an increase of 1.21% for income, before inflation, but a 2.05% increase in PCE. Unless you think that we as a nation are going to return to the pre-meltdown practice of spending every nickel we earn, pretty soon we are going to have to see incomes start to catch up, or people will no longer be able to continue to spend.
As the residual, the percentage change in savings is very sensitive to the changes in both spending and income. That seemingly small increase in spending relative to income resulted in a massive 25.4% drop in savings.
Sources of Personal Income
The source of personal income can be as significant, or at least as interesting, as the overall level. The biggest and most significant source is, of course, wages and salaries. Those rose by $17.3 billion in September after falling $8.6 billion in August. The rise was not very big, but at least it was an increase.
Over the last six months wages are up by $84.2 billion, or 1.27%. Private sector wages accounted for more than all of it for the month as they rose by $17.9 billion while government wages were down by $0.7 billion for the month. Over the last six months, private sector wages have increased by $85.6 billion while government wages actually fell by $1.4 billion.
In percentage terms, over the last six months, private wages are up 1.58%, while government wages are down 0.12%. Within the private sector, wages for the Goods Producing sector were up $1.6 billion, but manufacturing wages fell by $1.1 billion.
Over the last six months, goods producing wages are up by $14.6 billion or 1.33%, while manufacturing wages are up by just 0.88%. The service sector is much larger, and it saw its total wages increase by 16.3 billion for the month and by $71 billion, or 1.29% over the last six months.
Transfer Receipts
Another big source of personal income is transfer receipts, like Social Security, Medicare/Medicaid and Unemployment Insurance. In total those were up $0.6 billion in September after plunging $9.7 billion in August. Over the last six months, they are down by $3.2 billion, or 0.14%.
For the month, Social Security income was up by $1.6 billion, and over the last six months it is up by $12.6 billion, or 1.79%. The front edge of the Baby Boomer wave is just starting to retire, and many people who have run out of unemployment benefits have managed to find their way onto the Social Security disability roles.
Income from unemployment insurance rose by $2.0 billion in September, but over the last six months is down by $10.4 billion or 9.08%. That would be nice if this meant people getting jobs, but I suspect it is mostly just from benefits running out.
The big government medical programs are moving in opposite directions. Medicare, which helps seniors, saw a $1.4 billion increase, and is up by $8.4 billion or 1.52%, over the last six months. Medicaid, which helps the poor, saw a $5.3 billion drop in September, and over the last six months is down by $27.1 billion or by 6.32%. In other words, spending on the elderly is rising slightly faster than private sector wages and spending on the poor is plunging.
The final major category of government transfer payments is Veterans Benefits. Those have also been rising, driven by those who are returning from Iraq and Afghanistan. In September they were up by $300 million and over the last six month are up by $3.3 billion, or 5.29%. Not exactly runaway government spending on that front, either.
Proprietors’ Income
Proprietors’ income, or what generally can be thought of as small business income rose by $2.3 billion on top of an increase of $8.4 billion in August. However, for the month, more than half of that, $1.3 billion came from farm income. Over the last six months, though, non-farm small business income has seen the majority of the gains, capturing $17.3 billion of the $18.3 billion total increase.
Farmers make up a much smaller proportion of proprietors income. In percentage terms, what most people think of when they think of small businesses has seen a 1.67% increase over the last six months, while farmers have seen a 1.45% increase.
Other Sources of Income
Rental income has started to accelerate as the apartment vacancy rate has declined and we have been starting to see an increase in effective rents. It rose by $5.8 billion in September and is up by $12.2 billion, or 3.05% over the last six months. There has been a real divergence, though, between interest income and dividend income.
Interest income fell by $13.5 billion in September, and is off by $26.1 billion or 2.59% over the last six months. Dividends, though, have been strong, with dividend income rising by $4.2 billion in September and up by $31.2 billion or 4.04% over the last six months.
Clearly, near-zero interest rates are not helpful for interest income. Short-term rates have been effectively at zero for almost three years now. Even those people who had longer-term bonds and CD’s at the time of the meltdown are now having to roll over those investments into much lower yielding paper.
On the other hand, corporate profits have been very strong, and businesses are not doing a lot of hiring. They have increasingly been plowing their cash flow into dividends and stock buybacks.
There are few things that are certain in investing, but there is one thing that is: If you buy a 10-year T-note, which is currently yielding 2.30%, you will never see your coupon payment increase. On the other hand, if you buy stock in Microsoft (MSFT), currently yielding 3.00%, there is a very high probability that your dividend, and thus yield on cost, will be substantially higher than it is now.
Some other good candidates for increasing dividend income are Intel (INTC), currently yielding 3.4%, DuPont (DD), yielding 3.6% and Phillip Morris (PM) with a 4.5% yield.
Income Inequality Increasing?
The report does not indicate within the wage data if the 1.58% increase is due from increases in the salaries of CEO’s or from the rank and file. However we do know that dividend income goes overwhelmingly to the very top of the income spectrum, as the top 1% own over 40% of all the stock.
Lots of people might have a few shares tucked away in their IRA or 401-K, but collectively the bottom 80% own very little of the stock market. The CBO tells us that in 2007, the bottom 80% of the population received just 20% of all the capital income in the country (interest, dividend and rental income), while the top 1% got 47.4% of the total.
Thus, if we are seeing rapid gains in capital income and slow growth in wage income, it is a very good bet that the trend towards increasing income inequality is continuing. If we look at all sources of market-based income (i.e. before government policy of taxes and transfers) the top 1% earned 21.3% of the total in 2007, up from 10.5% in 1979. After the effects of taxes and transfers, that share shrinks to 17.1%, up from 7.7% in 1979.
Therefore, firms that cater to the rich are likely to see more demand than those firms that cater to the poor or the middle class. For example, Starwood Hotels (HOT) which has several luxury brands such as St. Regis and Weston, is probably better positioned than say Intercontinental Hotels (IHG), with its more middle-class-oriented Holiday Inn brand.
DU PONT (EI) DE (DD): Free Stock Analysis Report
STARWOOD HOTELS (HOT): Free Stock Analysis Report
INTERCONTL HTLS (IHG): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
PHILIP MORRIS (PM): Free Stock Analysis Report
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