Good news and bad news on personal income and spending
Good news and bad news on personal income and spending
– by New Deal democrat
December personal income and spending had some material for both optimists and pessimists.
Let’s look at the good news first, mainly having to do with inflation. Both the total and core personal consumption deflator continued their overall deceleration in December, with the former up +0.3% for the month, and the latter, said to be much beloved by the Fed, up just enough to be +0.1% rather than unchanged. There’s been a lot of discussion about the abatement of inflation since June, and this is in line with that idea, as shown by the quarterly changes in both of the above metrics:
The quarterly changes in both deflators is at their lowest levels since Q1 2021.
The YoY% change also declined for both:
Similarly, real personal income excluding transfer receipts, one of the four coincident indicators typically used by the NBER to determine if a recession has occurred, also increased nicely, by 0.2%, in December, to a new all-time high:
If you wanted to tout good news, there it is. The bottom line is: a decline in gas prices from $5 to $3 in 6 months can do a world of good to inflation data.
Now let’s start to segue to the bad news.
Here is an update to the graph I’ve been running for about the past year, showing real personal income (red) and spending (blue) normed to 100 in May 2021, right after that spring’s stimulus spending splurge:
As noted above, real personal income continued to increase in December, and is up 1.3% since June, when gas prices were $5/gallon. But they remain -1.4% below their level of May 2021. And the increase in real personal spending appears to have reversed, down for the second month in a row, by -0.3%. It is down -0.5% since its peak at 4% over May 2021 levels.
Further, the personal saving rate increased 0.5% for the month, and is up 1.0% from its lowest level of 2.4% in September (which except for July 2005 was its all-time lowest reading):
Why is this bad? Because as expansions go on, consumers tend to go more and more out on a limb, i.e., their saving rate goes lower. When bad things start to happen, they pull in their horns, i.e., their saving rate increases. Although this is a noisy metric, it is one of the hallmarks of the onset of a recession, and is a crucial part of my “consumer nowcast” model, which turned negative about 3 months ago.
Also, real personal income excluding transfer receipts, discussed above, is only up 0.3% YoY. It has been essentially flat YoY since June. Here’s what that looks like historically:
A flat to negative YoY change in this metric has, with only one exception, for the past 60+ years meant a recession is occurring.
One final note: the personal income deflator goes into the calculation of real manufacturing and trade sales, another one of the “big 4” coincident indicators of recession used by the NBER. It declined for the second month in a row, by-0.4%:
It joins industrial production to become the 2nd of the “big 4” to have apparently rolled over. As discussed above, real personal income less transfer receipts remains positive (but with gas prices increasing again in January, it will have a much more challenging comparison next month), as does jobs growth.
To recapitulate: there was good news today on the inflation front, perhaps helping the Fed pause in raising rates; but there was bad news on most of the indicators which immediately precede or are coincident with a recession.
Real personal income and spending, NDd, Angry Bear
(I am declaring this on-topic.)
America Has a Debt Problem, and the Answer to It Starts With Form 1040
NY Times – Jan 25
Washington’s favorite show, “Debt Ceiling Chicken,” is playing again in the big white theater on Capitol Hill. And once again, it is diverting attention from the fact that the United States really does have a debt problem.
Republicans and Democrats in recent decades have hewed to a kind of grand bargain, raising spending and cutting taxes, and papering over the difference with a lot of borrowed money.
From 1972 to 2021, the government, on average, spent about 20.8 percent of gross domestic product while collecting about 17.3 percent of G.D.P. in revenue. It covered the gap with $31.4 trillion in i.o.u.s — the federal debt.
The government relies on this borrowed money to function, and for decades, it has defied a variety of dire predictions about the likely consequences. Notably, there’s no sign that Washington is exhausting Wall Street’s willingness to lend. In financial markets, U.S. Treasuries remain the ultimate comfort food. There’s also little evidence the government’s gargantuan appetite is making it harder for businesses or individuals to get loans, which could impede economic growth. …
But the federal debt still carries a hefty price tag.
The most immediate problem with the government’s reliance on borrowed money is the regular opportunity it provides for Republicans to engage in blackmail. Congress imposes a statutory limit on federal borrowing, known as the debt ceiling. The government hit that limit this month, meaning the total amount of spending approved by Congress now requires borrowing in excess of that amount.
Raising the ceiling ought to be a formality, since it simply allows the government to meet the obligations Congress already has approved. But House Republicans say they won’t raise it without a deal to cut future spending.
The Biden administration is rightly insistent that it won’t pay Congress to do its job, as the Obama administration agreed to do in 2011.
After all, Americans don’t want large spending cuts. The vast majority of federal spending is supported by most Americans. About 63 cents of every federal dollar goes to mandatory programs, the largest of which, Social Security and Medicare, are wildly popular. Others, like Obamacare subsidies, are less popular, but there’s no need to speculate about what would happen if Republicans tried to cut the program. They’ve tried and failed repeatedly. An additional 15 cents goes to discretionary programs. The big-ticket items, like health care for veterans, highway construction and subsidies for law enforcement, are pretty popular, too. The rest is the defense budget and interest payments.
Indeed, Americans need more federal spending. The United States invests far less than other wealthy nations in providing its citizens with the basic resources necessary to lead productive lives. Millions of Americans live without health insurance. People need more help to care for their children and older family members. They need help to go to college and to retire. Measured as a share of G.D.P., public spending in the other Group of 7 nations is, on average, more than 50 percent higher than in the United States. …
But Democrats ought to emphasize a distinction between resisting Republican demands and defending the government’s current borrowing habits. There is another, better way to fund public spending: collecting more money in taxes.
In recent decades, proponents of more spending have largely treated tax policy as a separate battle — one that they’ve been willing to lose.
They need to start fighting and winning both.
It costs money to borrow money. Interest payments require the government to raise more money to deliver the same goods and services. Using taxes to pay for public services means that the government can do more.
The United States paid $475 billion in interest on its debts last fiscal year, which ran through September. That was a record, and it will soon be broken. In the first quarter of this fiscal year, the government paid $210 billion.
The payments aren’t all that high by historical standards. Measured as a share of economic output, they remain well below the levels reached in the 1990s. Last year, federal interest outlays equaled 1.6 percent of G.D.P., compared with the high-water mark of 3.2 percent in 1991. But that mark, too, may soon be exceeded. The Congressional Budget Office projects that federal interest payments will reach 3.3 percent of G.D.P. by 2032, and it estimates interest payments might reach 7.2 percent of G.D.P. by 2052.
That’s a lot of money that could be put to better use.
Borrowing also exacerbates economic inequality. Instead of collecting higher taxes from the wealthy, the government is paying interest to them — some rich people are, after all, the ones investing in Treasuries.
If the debt ceiling serves any purpose, it is the occasional opportunity for Congress to step back and consider the sum of all its fiscal policies.
The nation is borrowing too much but not because it is spending too much.
The real crisis is the need to collect more money in taxes.
(It looks like, due to mandatory increasing 401k/IRA distributions, Mrs Fred and I are going to pay at least 6 times more this April than in recent years. Probably this will be true for many as boomers age.)
Unless you need it, roll it over. Income taxes favor oldsters.
Oddly enuf I did not know this.
But it appears you must do this through the auspices of the company that is doing the distributions. You cannot do this (?) with funds you have withdrawn.
IRS – Rollovers of Retirement Plan and IRA Distributions
However, says the IRS:
You can roll over all or part of any distribution from your IRA except:
A required minimum distribution or
A distribution of excess contributions and related earnings.
You can roll over all or part of any distribution of your retirement plan account (401k) except:
Required minimum distributions,
Loans treated as a distribution,
Distributions of excess contributions and related earnings,
(and a few other categories)
By such I meant, create a separate investment account. If you do not need the money reinvest it. You will have already paid the tax of the part you must take.
A better alternative for us has been to donate funds as Qualified Charitable Deductions, which are withdrawn from my IRA and go directly to charities. These count toward my RMD, but are not considered taxable income by the IRS, hence a tax savings.
As of this year, we decided we need more funding, and expect to pay even more taxes as required. Whatever is left does already get re-invested in a separate account.