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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.


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