Heavy revision to personal income data in US shows debt stress
The Bureau of Economic Analysis just released the June data for personal income and outlays. It shows a mild uptick in both personal income and consumption.
Personal income increased $18.7 billion, or 0.1 percent, and disposable personal income (DPI) increased $16.3 billion, or 0.1 percent, in June, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $21.9 billion, or 0.2 percent. In May, personal income increased $23.2 billion, or 0.2 percent, DPI increased $17.6 billion, or 0.2 percent, and PCE increased $5.9 billion, or 0.1 percent, based on revised estimates.
Real disposable income increased 0.3 percent in June, in contrast to a decrease of less than 0.1 percent in May. Real PCE decreased less than 0.1 percent, compared with a decrease of 0.1 percent.
There are a lot of revisions here just like in the GDP data and I will crunch the numbers. But the headline is like it was for GDP:
Disposable personal income (DPI) (personal income less personal current taxes) was revised up $71.6 billion, or 0.7 percent, for 2008; was revised down $246.1 billion, or 2.2 percent, for 2009; and was revised down $195.0 billion, or 1.7 percent, for 2010.
The personal saving rate (personal saving as a percentage of DPI) was revised up from 4.1 percent to 5.4 percent for 2008, was revised down from 5.9 percent to 5.1 percent for 2009, and was revised down from 5.7 percent to 5.3 percent for 2010.
What does it mean that disposable income was revised down all three years, yet the savings rate was revised down in 2009 and 2010? I think it means that people were under debt stress trying to maintain lifestyles once the technical recovery formed. This was what I said in the last post on HSBC that I expect to occur going forward.
Notice that savings levels in the US are still well below their levels from the 1980s or 1990s. The question is whether easy money will create sustainable growth or depress savings rates. I say it is the latter.
Higher interest rates will help people cut expenditure faster and make savings. The problem is that will just rebound as the paradox of thrift. Great for one person but lousy if 300 million are doing the same. No one will borrow with low rates because they probably are not creditworthy enough to qualify anyway. So the reliance on encouraging loans will just delay any meaningful reforms.
It just showed that the average person knew better than the economists what state the economy was in. A sorry state of affairs for the profession.
The paradox of thrift kills (individual & collective) saving as a way out of recession and depression. Because of the way debt interest accumulates; insolvency trumps thrift. The subprime borrower gets out of the debt trap only by taking a risk that pays off. Otherwise he/she defaults. The (only?) real reset is extinguishing non-productive debt. Default always looms on the horizon, because debt is a bet. Buying depreciating assets with debt is the foundation of financial illiteracy.
Ye, Ken, I also believe deleveaging means a lot of defaults to extinguish non-productive debt. The question is what the economy’s tolerance for those defaults is before it creates a spiral down and whether policy avoids that spiral without dragging out the situation so much that it builds more non-productive debt than is extinguished.