Thank you, hallelujah, for the extra money, finally. But where did it go?
By Wolf Richter for WOLF STREET.
The personal income of Americans from all sources – from wages, salaries, interest, dividends, rental income, unemployment compensation, stimulus checks, Social Security benefits, etc. – jumped by 0.4% in November from October, by 7.4% from a year ago, and by 11.7% from two years ago, according to the Bureau of Economic Analysis today.
This surely makes Americans feel good. But these feel-good aspects of inflation curdle when confronted with new prices.
Adjusted for the worst inflation in 40 years, consumers’ personal income from all sources declined by 0.2% in November, the fourth month in a row of month-to-month declines, as Americans were unable to outrun this rampant inflation.
Compared to a year ago, this “real” income from all sources was up by only 1.6%, and compared to two years ago, it was up 4.5%. That includes all the income from other sources, including government transfer payments. In a moment, we’re going to strip those out.
Here’s income from all sources: not-adjusted for inflation (green line) and adjusted for inflation (red line). I set the starting point of the two indices at January 2019 with a value of 100. Note the yawning gap between income before inflation and income after inflation. That gap is going to get a lot bigger as we peel the onion.
The grotesque gyrations of personal income last year and earlier this year are a result of the various stimulus payments and special unemployment benefits. Most of these pandemic-specials have now expired:
But wait… just salaries and wages.
American worker bees have received the largest pay increases in many years, finally, thank you hallelujah. In some industries, these increases were well over 10% on average. In others, not so much. The pay increases came about as companies are struggling to hire people, while people have decided for whatever reason that they don’t want to be hired under the current conditions – leaving a record 11 million job openings unfilled.
Compensation from wages and salaries in November rose by 0.5% for the month, by 8.9% year-over-year, and by 12.5% from two years ago. And that would be something to celebrate, thank you, hallelujah. But then came inflation.
Adjusted for the worst inflation in 40 years, total compensation fell by 0.2% for the month, has been roughly flat since June, was up only 1.4% from a year ago, and was up just 2.0% from two years ago.
Note the sharply widening gap between income not-adjusted for inflation (green line) and income adjusted for inflation (red line):
But wait… per household.
The above income indices reflect income for all workers combined. It amounts to nearly $1 trillion per month in actual salaries and wages. But the number of households is growing in the US, and so on a per-household basis, that income pie gets cut into more slices.
Not adjusted for inflation, income from wages and salaries in November on a per-household basis ticked up 0.1% for the month, and rose by 7.2% year-over-year, and by 8.7% from two years ago.
Adjusted for the worst inflation in 40 years, income from wages and salaries on a per-household basis fell by 0.6% for the month, fell by 0.2% year-over-year, and fell by 1.4% from two years ago.
In other words, inflation whittled down the purchasing power of labor; and the rising number of households feeding on this inflation-diminished income pie then whittled down the size of the average slice to where it is now below where it was two years ago, and it’s below where it was nearly three years ago.
This is the effect of inflation and population growth combined on aggregate economic data: It looks great before inflation is taken into account; it looks less great after inflation; and it looks a lot less benign on a per household basis.
But the per-household-basis – not the aggregate economic data – is what Americans are feeling and struggling with every day, and inflation is whacking those households.
The income to be “disposed” of.
This phenomenon of inflation and population growth whittling down the individual slice of the pie during inflationary times is also showing up in the broad measure of per-capita “real” disposable income, which tracks income from all sources, including government transfer payments and income from interest and dividends, then subtracts out income-related tax payments, adjusts the remainder for inflation, and then divides what’s left by the US population.
In November, the per capita “real” disposable income from all sources dropped 0.2% for the month, was down 0.2% year-over-year, and was up only 2.5% from two years ago, having now solidly dropped below the pre-pandemic trend, thanks to the miracles of inflation:
Disposable income is what consumers can spend on goods and services, such as cars and housing and food, or they can buy stocks and other investments with it. With the worst inflation in 40 years eating up income gains, plus some, consumers have less money to spend in real terms.
But in reality, consumers can borrow to buy what they want: auto loans, credit card loans, levering up the stock market portfolio and crypto wallet, cash-out refis, etc… the opportunities to spend borrowed money to pump up GDP are endless.
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