Personal Income Spiked But Risks Remain
When Personal Income spiked this past month, expectations of faster economic growth surfaced despite a still tepid labor market. The fact is all of the increase in Personal Income was due to government stimulus checks and unemployment benefits. These are not the types of personal income increases that compel consumers to spend.
With the stimulus bill likely to get passed in some form, an additional boost to personal income is likely in the near-term, and a good portion of any additional stimulus or unemployment benefits will likely go into savings. Some of the funds will be spent, of course, but last month the Savings rate was 20%, partly due to consumers making sure they put some money away in the event their job prospects remain bleak or government help ends.
Any increases in Personal Income don’t lead to increases in spending, however, unless that income comes primarily from compensation. The difference in personal income over the last 12 months compared to January 2020 is entirely due to temporary payments. Compensation, which is represented by the Gray bars below, only recently surpassed pre-pandemic levels. Interestingly, the level of Personal Outlays is still below levels from early in 2020. The rest of the funds have gone to Savings.
Contrary to some opinions that Savings will eventually be spent on goods and services, I believe Savings are a result of fear and this fear isn’t likely to go away soon. It will take a considerable recovery in the labor market for consumers to feel confident enough to spend any savings they may have accumulated over the past 12 months. It will eventually get spent, but it is much more likely to trickle out as the unemployment rate declines and the 10 million people that are currently out of work today start receiving regular paychecks.
Eventually, income will flow through to the purchase of goods and services and the yield curve will steepen as growth accelerates – but the increase in the headline Personal Income number only serves to drive a false sense of optimism.