Personal Income Levels – Easy Trends (thru April 2013)

Let’s talk about personal income levels, its importance and the current trends.  I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis.  Please visit my latest personal income levels trend analysis for more info.

Quick ‘n Easy

Personal income levels are important for the health of the economy.  When people have more income, they spend more, which helps business grow and employ more people … a prosperous circle of event.  The group that officially decides whether the economy is growing or shrinking looks at something called “real personal income less transfer payments.”  That basically means they take all the income people make and subtract money they get without doing any work, like government benefits.  The “real” refers to the fact that this statistic is adjusted for inflation.

Here’s a ten-year chart of the personal income levels (without transfer payments and adjusted for inflation) from the Federal Reserve Bank of St. Louis:

Personal Income Levels - Real Personal Income Less Transfer Payments - April 2013 - FRED

Source: StLouisFed.org

Personal Income Levels Trends and Projections

Below, I will discuss whether industrial production is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.

Personal Income Levels Trend Analysis

Quick ‘n Easy

The personal income levels, excluding transfer payments and adjusted for inflation, may have been falling by about $223.2 billion per month between December 2012 and February 2013, although the two latest readings (March, April) were both too high to include in this downward trend (good news). Besides, this trend is unconfirmed (only 57 percent confidence) and is being influenced by an artificially high report in December, which makes it look like there is a steep falling trend.  We’ll see what’s really happening after the next report.  Remember, rising incomes support consumer spending, which happens to be about 70 percent of the economy.

Personal Income Levels - Real Personal Income Less Transfer Payments - April 2013 - Trends

Source Data: Bureau of Economic Analysis

Current Trend: Dec 2012 – Feb 2013 – Unconfirmed downward trend of about $223.2 billion per month, which is about 2.3 percent of the latest figure – but read on to see why you shouldn’t be too concerned about this trend.  The two latest readings (March, April) were both too high to include in that downward trend, making it possible for the next report to break this before it becomes confirmed (fingers crossed).  Confidence level for this trend is only 56.6 percent.

Last Confirmed Trend: Aug – Oct 2012.  During that time, personal income levels were rising slowly by about $130.5 billion per month.

Projected Next Data Point

The next report is for May 2013.  If the recent trend (excluding any off trend points) extends perfectly, the next reading of personal income levels will be about $8.832 trillion for May 2013, a decrease of 8.6 percent from the previous month.  That kind of huge drop in one month won’t happen – trust me.  Let’s hope we see at least a slight increase or about the same as April, which would probably end the unconfirmed downward trend and replace it with a very slowly rising trend.  I still don’t buy this “unconfirmed trend” at all, because it’s an artifact from unusual circumstances the last few months.  The surge at the end of 2012 was due to a temporary issue with tax rates on dividends going up in 2013, which caused many companies to issue their dividends early so their shareholders could pay lower taxes.  In 2013, we expected that personal income would suffer early on as a payback for those temporarily-carried-forward payments.

Easy Take

The report for the April 2013 personal income levels showed a modest one-month rise of 0.32 percent.  Ignore the “unconfirmed downward” trend in the current analysis, because it’s using a data point (Dec 2012) that was ridiculously high as the start of a downward trend.  If the next report shows another small rise as one might expect, the current unconfirmed trend will never be confirmed, and the real starting point for a rising trend will be the January time point.  The problem with the December report was that the surge in income was due to a special factor.  Tax rates on dividends (profits that companies pay out to their shareholders) increased in 2013 versus 2012, so many companies were paying out those dividends earlier than usual.  As such, this turned out to be a big negative factor for the personal income report of January 2013.

Personal income levels are critical for consumers to be able to continue spending, supporting businesses, which can then turn around and hire more workers.  In fact, income is a more significant predictor of consumer spending than things like consumer sentiment or confidence.

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