Personal Income Still Higher Than Pre-Pandemic

When the second quarter GDP numbers came out on July 30, they looked predictably terrible: second quarter GDP was about 8 percent lower¹ than the first quarter, which was itself lower than the previous quarter.

But there was much less fanfare about the June personal income figures that came out the next day, and what little news they generated was quite misleading. Yes, personal income for June was down slightly from May, but personal income for April and May was artificially juiced by massive unemployment benefit payments and the one-time $1,200 economic impact payments. The real story: personal income was higher in June compared to February, when the economy was humming along unassisted by the federal government’s printing press.

Figure 1, updated from a previous post, shows the components of personal income from February through June.

Wages remain 6 percent below February. Proprietor’s income is 12 percent lower, reflecting the still struggling service sector. Investment income is down slightly, as interest rates fall and landlords face lower rent payments. Retirement benefits are steady. In all, the normal sources of income are still down 6 percent from February. But this has been more than backfilled by unemployment insurance and other forms of public assistance. In all, personal income in the country was 4 percent higher in June than in February.

So why the disconnect between GDP and personal income? Simple. Households are not spending all the personal income they receive. GDP is based on transactions, and there are fewer of them taking place, as consumers sit on their wallets. Figure 2 shows the basic disposition of personal income.

Spending continues to recover. June spending on durable goods was well above the February level, as consumers return to stores and car dealers and spend big on boats and RVs for the summer. Non-durable goods spending was just about at the February level. Services spending remains 12 percent lower than February.

The gap between the higher personal income and the lower spending continues to be very high rates of personal savings. Households are socking away huge amounts of money, whether out of fear for the future, uncertainty or just not having appealing ways to spend it.

Looking Ahead

With services spending still down, and renewed shutdowns of service sectors as coronavirus surges around the country, we will probably not see recovery back to pre-pandemic levels any time soon. Congress will likely pass a new relief package of some kind, and it will, we hope, provide stability for the most vulnerable households. But if consumers who remain economically secure keep sitting on their cash, we will continue to see the weirdness of rising personal income, tepid GDP recovery and big savings accounts.

1. The Bureau of Economic Analysis provides GDP figures as “annualized rates.” But this can be quite misleading when dealing with one-time phenomena such as the pandemic shutdown. We simply divide the reported annualized rate of 31 percent by four to get a quarterly reduction.