BEA’s Personal Income Report: Small Business Income, Disposable Income and Consumers

By at 29 January, 2021, 1:46 pm

by Raymond J. Keating-

The latest report on personal income from the U.S. Bureau of Economic Analysis showed growth in personal income resuming in December, after two months of rather stark declines. However, small business income clearly continues to suffer.

Personal Income Grows, Small Business Income Shrinks

After declining by 0.7 percent in October and by 1.3 percent in November, personal income grew by 0.6 percent in December.

A good chunk of the increase in personal income came via government benefits, while, for example, proprietors’ income (mainly, small business income) declined for the second straight month.

In fact, nonfarm proprietors’ income fell for the third consecutive month. Indeed, the recent decline has been substantial.

Source: Federal Reserve Bank of St. Louis, FRED

Arguably the most important measure in the monthly report on personal income is real per capita disposable income, that is, personal income less personal current taxes, and adjusted for inflation and population.

This is the money from which individuals consume, save and invest. This measure rose slightly in December, but the trend down since pandemic government aid was handed out in April has been unmistakable and worrisome.

Source: Federal Reserve Bank of St. Louis, FRED

Meanwhile, after a decline of 0.7 percent in November, personal consumption expenditures in December declined by 0.2 percent. Or, if we look at inflation-adjusted consumption, the decline in December was 0.6 percent, again following a 0.7 drop in November.

There have been an assortment of possible explanations served up for this decline. My favorite was offered by an economist in a Wall Street Journal report: “‘The consumer has plenty of money to spend and looks like maybe is going to get some more soon if we get yet another round of rebate checks,’ said Stephen Stanley, chief economist at Amherst Pierpont. ‘But the opportunity just isn’t there’ to spend it.” Well, perhaps to some degree.

But far more likely is the fact that individuals understand that the economy remains in deep trouble. After all, why would government be doling out checks if we weren’t in trouble? Many people are unemployed or concerned about becoming unemployed, and they don’t see businesses investing and hiring.

Therefore, no one should be surprised that consumers aren’t spending, but instead remaining hunkered down, protecting themselves until they see a turn in the economy, especially, spotting businesses being created and investing.

This is not a new story. Time and again, government provides tax rebates or stimulus checks expecting consumers to spend, and then turn out to be surprised when a hefty portion of such aid winds up not being spent. Remember, consumers are followers.

As the Fed correctly noted in its most recent FOMC statement, “The path of the economy will depend significantly on the course of the virus, including progress on vaccinations.”

And on the other side of the pandemic, government will need to get policymaking right in terms of tax and regulatory relief, and advancing free trade, for example, if we want to get back to strong growth.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.




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