Disposable Income Finally Recovers BUT Three-Year Stagnation is Troubling

By at 24 February, 2023, 9:38 pm

by Raymond J. Keating –

The latest personal income report from the U.S. Bureau of Economic Analysis offered some hope, along with troubling reminders.

First, it was noted that personal income in January grew by 0.6 percent. Normally, that would be good news. However, inflation – as measured by the PCE price index in this report – also registered 0.6 percent in January. So, in real terms, personal income growth was flat in January.

Second, however, real personal consumption expenditures grew by 1.1 percent in January.

Third, real disposable income (i.e., personal income less personal current taxes and adjusted for inflation) increased by a robust 1.4 percent in January.

Fourth, if we add population into the equation, real per capita disposable income also grew by 1.4 percent. In fact, we’ve seen growth in real per capita disposable income in each month since June 2022. (See the following chart.)

Source: Federal Reserve Bank of St. Louis, FRED

That’s good news, given that it is out of disposable income that individuals are able to consume, save and invest. So, this arguably is the most important income measure, and it has been moving in the right direction for seven consecutive months now.

That’s also important given that moving beyond the immediate effects of the pandemic and related government support measures, real per capita disposable income had dropped below its pre-pandemic level and remained there throughout 2022. The increase in January finally brought real per capita disposable income just above its February 2020 level.

While that, too, is a welcome development, it also must be noted then that real per capita disposable income effectively has been flat for three years. That’s a deeply troubling reality for individuals, families, entrepreneurs and businesses.

Elected officials need to recognize this challenge and push forward with measures that will make a real difference. That would not be about increasing government handouts that actually disincentivize work and entrepreneurship, but instead, it would be about providing substantive tax relief that incentivizes the activities that drive disposable income higher, i.e., entrepreneurship, investment and work.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.


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