Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Key Economic Driver: Disposable Personal Income

Posted by Larry Doyle on June 4, 2013 10:02 AM |

There are a host of economic statistics that can be and are utilized to measure the health and forward path of our economy. From GDP to employment to housing starts to inflation, all of these stats can offer a gauge as to how steep our economic landscape is and will be.

What do I believe is now the single most important economic piece of data to forecast our economic future? Disposable personal income. Why so? 

While the Fed tries to create an increased wealth effect by juicing the market and in turn the economy, all too much evidence now indicates that stocks are held by a smaller percentage of our populace. The recent increase in housing prices may prove to be a salve for those who watched their home values plummet by 30-40% but I do not expect to hear anybody borrowing against their home equity anytime soon.

So in my mind, disposable personal income is the key to measure how real final sales and other downstream economic statistics will play out. Let’s navigate and take a harder look at this key economic driver.

Disposable Income is the amount of money that households or persons have available to spend and save after paying income taxes and pension contributions to the government. The revenue may include employees’ compensation, property income, social benefits, money earned abroad and other incomes.

Do you feel like you have more disposable do-re-mi in your pocket to spend as you’d like? Maybe not? Thanks to the folks at Advisor Perspectives, let’s take an even closer look at this key economic driver.

This chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. The 0.19 percent nominal month-over-month shrinkage is a disturbing move after the pattern of oscillation during November-to-February caused by year-end 2012 tax management strategies. The April nominal data puts us back to the level of October 2012.

Click to View

The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let’s compare the nominal and real growth in per capita disposable income since 2000. Do you recall what you we’re doing on New Year’s Eve at the turn of the millennium? Nominal disposable income is up 50.5% since then. But the real purchasing power of those dollars is up only 14.8%.

Year-over-year disposable per-capita income is up a meager 1.01%. But if we adjust for inflation, its only up 0.27%.

Focus on those last three numbers. Real purchasing power of average 2005 dollar value is up less than 15% since the turn of the century, that equates to slightly more than 1% per year.

Year over year disposable income is up a paltry 1.01% and inflation adjusted up a token .27%.

With statistics such as these, increasing home prices will only equate to housing becoming more expensive and hence not affordable. The same can be said for a host of other items, including healthcare. That grinding sound you hear is the majority of our population getting increasingly squeezed economically.

If business does not generate meaningful increases in revenues that can and are passed along to employees in the form of increased income, our economy will continue to bump along at best and run the risk of hitting speed bumps and slowdowns as we go.

Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.


  • LD

    Bill Gross writes regarding the FEd’s QE policy and our economy in his monthly newsletter,

    Their near-zero-based interest rates and QEs that have lowered carry and risk premiums have stabilized real economies, but not returned them to old normal growth rates.

    History will likely record that these policies were necessary oxygen generators. But the misunderstood after effects of this chemotherapy may also one day find their way into economic annals or even accepted economic theory.

    Central banks – including today’s superquant, Kuroda, leading the Bank of Japan – seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment. That theory requires challenge if only because it doesn’t seem to be working very well.

    Well, there is my still incomplete thesis which when summed up would be this: Low yields, low carry, future low expected returns have increasingly negative effects on the real economy.

    Granted, Chairman Bernanke has frequently admitted as much but cites the hopeful conclusion that once real growth has been restored to “old normal”, then the financial markets can return to those historical levels of yields, carry, volatility and liquidity premiums that investors yearn for.

    Sacrifice now, he lectures investors, in order to prosper later. Well it’s been five years Mr. Chairman and the real economy has not once over a 12-month period of time grown faster than 2.5%. Perhaps, in addition to a fiscally confused Washington, it’s your policies that may be now part of the problem rather than the solution.

    Perhaps the beating heart is pumping anemic, even destructively leukemic blood through the system. Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution.

    Perhaps when yields, carry and expected returns on financial and real assets become so low, then risk-taking investors turn inward and more conservative as opposed to outward and more risk seeking. Perhaps financial markets and real economic growth are more at risk than your calm demeanor would convey.

  • Peter Scannell

    Squeezing mom and pop out of the neighborhood.

    Behind the Rise in House Prices, Wall Street Buyers

  • MS


    As first-time homebuyers fall by 25% since last year and most are learning that buying a new house is more challenging than ever, economic researcher and founder of Peak Prosperity, Chris Martenson Ph.D, alerts first-time homeowners to the major warning signs surrounding the current housing market.

    “Prices send signals to people,” said Martenson. “Of course, we just came through a housing bubble. So you’d think that once burned, twice shy, would be the operating principle here, but many folks are again caught up in the idea that ‘investing’ in houses is a good idea. If prices have outstripped fundamentals and also rely on artificial props like foreclosures limited by regulations and ultra-low interest rates instead of rising incomes and robust job creation, then we can say there’s another period of financial excess in play, if not another bubble.”

  • Cindy

    WASHINGTON, D.C., June 5, 2013 — Chief economist for the National Federation of Independent Business (NFIB) William C. Dunkelberg, issued the following statement on the May job numbers, based on NFIB’s monthly economic survey that will be released on Tuesday, June 11, 2013. The survey was conducted in May and reflects the responses of 715 sampled NFIB members:

    “After a five-month swing in the right direction, small firms were shrinking again in May: Small employers reported an average gain of negative 0.04 workers per firm—essentially zero. The news here is that the steady, but painfully slow journey toward positive job creation can’t seem to maintain any steam. We have only to look to Washington as to the reasons why.”

  • fred

    Let’s not forget that your property taxes rise with an increase in housing prices, this will also have a neg impact on disposable personal income.

    Hmmmm, I wonder, now that housing prices are recovering, maybe my town will roll back the prop 2.5 override that was passed.

    It’s funny how the real estate price decline never resulted in a reduction in my property tax but the override was necessary to offset the impact of the economic slowdown.

    A $500+ increase in property taxes every year vs. a one time $250 ipad for the students, that’s what I call a bargain!

Recent Posts