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By Wolf Richter for WOLF STREET.
Fueled by incomes that outgrew inflation, our Drunken Sailors, as we’ve lovingly and facetiously called them for well over a year, continued to increase their spending in May, and they did so at a solid pace, roughly in line with the Good Times just before the pandemic, and they saved the rest, our Drunken Sailors, and the savings rate ticked up too.
Disposable income, adjusted for inflation, jumped by 0.5% in May from April, the biggest increase since January 2023, according to the Bureau of Economic Analysis today. By contrast, in April, disposable income had barely kept up with inflation.
Compared to a year ago, inflation-adjusted disposable income rose by 1.1%. This marks the 17th month in a row when disposable income outran inflation on a year-over-year basis, after having taken a massive hit in 2021 and through mid-2022, when the explosion of inflation far outran the lagging wage increases. But this growth rate of “real” incomes has slowed dramatically from the 4% year-over-year range in 2023 to about 1%. Nevertheless, they’re out-earning inflation, and that’s what matters.
Disposable income is income from all sources after income taxes and social insurance payments. It includes income from wages and salaries, transfer payments from the government (mostly Social Security benefits, but also VA benefits, unemployment benefits, welfare benefits, etc.), income from interest, dividends, rentals, farms, personal businesses, etc. But it excludes capital gains. Disposable income is what consumers have left to spend on goods and services and to save. And they spent a lot and saved some too.
Personal income without transfer receipts, adjusted for inflation, rose by 0.5% in May from April, or by an annual rate of $81 billion, and by 2.0% year-over-year. It means our Drunken Sailors have out-earned inflation by a fairly wide margin, after having taken a beating in 2021 through mid-2022.
This is income from wages, interest, dividends, rental properties, farm income, small-business income, etc.
This income growth is a function of employment growth, rising wages, higher dividend and interest incomes, higher rental incomes, etc. About 11 million single-family rental houses are owned by mom-and-pop landlords with 1-9 rentals, and for them, rental income matters.
Transfer receipts, adjusted for inflation, rose by 0.3% in May from April, or by an annual rate of $12 billion, and by 1.9% year-over-year.
Transfer receipts are currently dominated by Social Security benefits that grow with more people receiving them, and rising benefits. They also include VA benefits, unemployment benefits, welfare benefits, etc. But during the pandemic, they were dominated by stimulus checks, unemployment benefits, extra unemployment benefits, and other pandemic payments made to consumers (blue in the chart below).
The personal saving rate rose to 3.9%. That’s the portion of disposable income that consumers didn’t spend. It doesn’t mean that they put it into savings accounts. They might have bought stocks with it, or left it in their checking account, or used it to pay down credit cards, or bought shares of a money market fund with it, or whatever.
Americans are not big savers, never have been. Money is there to be spent. But some gets saved anyway. The current rate is lower than in the decade before the pandemic, but higher than in the years before the Financial Crisis.
How our Drunken Sailors disposed of their disposable income:
Consumer spending, adjusted for inflation, rose by 0.3% in May from April, and by 2.4% from a year ago. They were outspending inflation at a prepandemic clip: This “real” growth rate of 2.4% year-over-year is right in the range of the Good Times in the years before the pandemic, not exciting, but pretty decent for the US economy.
To see beyond the monthly squiggles, we also look at the three-month average (blue in the insert), which has been rising at a pace of 2.2% to 2.7% year-over-year for the past 12 months, right in line with a normal US economy.
Spending on services, adjusted for inflation, rose by 0.1% for the month and by 2.8% year-over-year.
Inflation in services is high, and it’s difficult to dodge because many services are essential, and consumers are griping and moaning about services inflation, but they still outspent it, but barely.
Spending on services accounts for 65.5% of total consumer spending. It includes rents, utilities, insurance, streaming, broadband, cellphone services, entertainment, healthcare, airfares, lodging, rental cars, memberships, etc.
Spending on nondurable goods, adjusted for inflation, rose by 0.3% in May from April, and by 1.6% year-over-year. Nondurable goods are dominated by food, gasoline, apparel, footwear, household supplies, etc.:
Spending on durable goods, adjusted for inflation, jumped by 1.1% for the month, after having declined the month before. So, the three-month average irons out some of those squiggles, and it rose by 0.13% month-to-month and by 1.9% year-over-year. It seems the pandemic has permanently shifted higher Americans’ inflation-adjusted purchase volume of durable goods. The trend never went back to normal, amazing:
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The post Our Drunken Sailors Leaving the Party? Nah, Not Yet: Incomes, Transfer Receipts, Spending, Saving, and Inflation appeared first on Energy News Beat.
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