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admin | August 2, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
This year’s GDP benchmark revisions delivered a game-changing boost to personal income that transforms the broad view of the US consumer. The level of personal income jumped by roughly $400 billion, or more than 2% of the total. Households usually will spend according to their income, and the new data point to a bright outlook for the consumer for the foreseeable future.
Benchmark revision
Although the BEA did not specifically say so in its initial reports on the benchmark revisions, it is reasonably safe to assume that the adjustments to the last few years of personal income announced July 26 reflected tax return data supplied by the IRS. Preliminary readings of key economic variables are often based on incomplete source data, and significant pieces of the underlying source data used to compute the nation’s output do not become available until months and sometimes years after the fact. There is a saying that households never pay taxes on income they did not earn. Household income tax returns are a far more accurate gauge of income than the survey-based preliminary figures derived from sources such as payroll and wage counts.
The July 26 revisions were monumental. About two-thirds of the $400 billion in extra income came in the form of higher employee compensation, as firms evidently paid out more of their revenues to their workers than previously estimated; corporate profits dropped by about $150 billion.
Households also enjoyed higher income from other sources, with proprietors’ income adjusted upward by $21 billion, interest income higher by more than $90 billion, and dividend payments raised by $80 billion. In contrast, rental income was lowered by $12 billion and government transfer payments dropped from prior estimates by $30 billion.
Household balance sheets
Household debt as a proportion of income has been falling steadily since the Great Recession and early this year reached its lowest level in proportion to GDP since 2002. The benchmark GDP revisions announced on July 26 put the consumer in even better standing, as the income available to service that debt turns out to be over 2% higher than previously thought. In addition, the savings rate was revised up again—this is the second year in a row that the benchmark revisions have pushed the savings rate up sharply—this time to over 8%, a level rarely seen in the past 25 years. A little over a year and two benchmark revisions ago, the savings rate had been estimated to be just over 3%, and now it is said to be over 8%, an unusually egregious example of how inaccurate preliminary data can be.
Income and consumption
These revisions to income underscore why the consumer has been so resilient in recent years. Real disposable income, after averaging growth of 2.3% over the six years through December 2016, surged to 3.6% in 2017 and 4.2% in 2018, far outstripping the pace of real consumer spending, which was 3.0% and 1.7% respectively. Even a moderation in the income measure in the first half of 2019 to 2.6% annualized growth merely brings gains back down to the pace of real spending advances.
Implications for wages
Employee compensation was adjusted upward by about $270 billion. That magnitude of a revision has to have implications for wage growth. One of the persistent puzzles in this expansion has been the lack of upward impetus to hourly wage gains despite a sharp tightening in labor market conditions. For the past few years, anecdotal and survey evidence has suggested that wage gains were larger than what most of the aggregate data were showing. The revisions to labor income will feed through into new data on hourly compensation in the productivity report due out August 15, but there is no direct link to either the average hourly earnings series or the ECI. The divergence between the various wage indicators is only going to widen, but the upward adjustments to wage and salary income imply that pay rates may have accelerated more in line with what history suggests in light of the tight labor market. Given delayed revisions and differences in how the various wage indicators are collected and processed, we may never have a proper answer to this enigma, but, on a broad level, the income figures are the bottom line for the economy: the future for the consumer looks bright.
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