Government Transfer Payments Distort Personal Income in January

Personal income jumped 10.0 percent in January, boosted primarily by a 52.0 percent surge in personal transfer payments, according to data from the Bureau of Economic Analysis (see first chart). Personal income data over the past eleven months have been sharply distorted by lockdown policies which caused massive layoffs, and government stimulus programs that sent transfer payments skyrocketing. Ultimately, a strong, self-sustaining economy without government distortions is likely to provide the most beneficial future.

Excluding personal transfer payments, personal income fell 0.1 percent in January and is down 0.6 percent over the latest 12-month period. In real terms (adjusting for price changes), personal income excluding transfers fell 0.5 percent in January, leaving that measure down 2.0 percent for the year. Both measures remain below their pre-pandemic levels (see second chart).

Personal tax payments fell 0.4 percent in January, leaving disposable personal income with an 11.4 percent jump for the month. Adjusted for price changes, real disposable income rose 11.0 percent in January.

Among the other components of personal income, wages and salaries, which typically account for about half of personal income, rose 0.7 percent for the month while supplements to wages and salaries (primarily employer contributions to pension and insurance funds and government social-insurance programs) which typically account for another 12 percent of personal income also posted a gain, rising 0.8 percent. Proprietors’ income fell 0.5 percent for the month following drops of 4.6 percent in December and 10.4 percent in November. Income on assets (interest and dividends) also fell, dropping 3.0 percent in the latest month.

On the spending side, total personal consumption expenditures (PCE) rose 2.4 percent in January following a 0.4 percent decrease in December. Among the components, durable goods rose 8.4 percent while nondurable-goods spending gained 4.3 percent and spending on services increased 0.7 percent for the month (see third chart).

The personal savings rate also surged in January, coming in at 20.5 percent of disposable income following rates of 13.4 in December and 12.5 in November, well above pre-pandemic rates (see fourth chart).

The price indexes from the report on personal income and spending are the primary measures followed by the Federal Reserve. The total PCE price index increased 0.3 percent in January as durable-goods prices rose 0.1 percent, nondurable-goods prices increased 1.0 percent, and services prices increased 0.2 percent. The PCE price index excluding food and energy rose 0.3 percent for the month.

Over the past year, the PCE price index is up 1.5 percent, versus 1.3 percent in the prior month. The core PCE index, which excludes food and energy prices, is up 1.5 percent from a year ago. Both measures have been running close to or below 2 percent since 2012 (see fifth chart).

Economic activity remains distorted following the outbreak of Covid-19 and the implementation of lockdown policies to reduce the spread of the virus. Extraordinary damage has been caused across the economy, but as government restrictions are eased, signs of recovery have emerged in some areas of the economy. The development and distribution of vaccines is a very positive factor and should eventually lead to sharply less government restrictions. In the meantime, the longer the virus continues to spread (along with the possibility of mutations prolonging the outbreak), consumers remain restricted, and businesses remain closed or limited, the more uncertain a labor market recovery becomes and the higher the probability of a slow and drawn-out economic recovery.

This article was first published by the AIER, and can be found here.


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