Wages & salaries rose at a solid pace, but Social Security payments returned to trend after a spike in April due to policy changes.

By Wolf Richter for WOLF STREET.

The recession talk started heating up again on Friday when the personal income data for May hit the news. Total personal income from all sources fell by 0.4% in May from April, the first month-over-month decline since September 2021. Personal income drops during a recession. So a drop in personal income, if persistent, is a worrisome event.

This is total consumer income. It includes wages and salaries, contributions by employers to retirement funds and social insurance, rental income, interest and dividend income, farm and small business income, and personal transfer receipts such as Social Security benefits paid to beneficiaries. In May, this income fell by 0.4% to a seasonally adjusted annual rate (SAAR) of $25.7 trillion.

But that drop was a false alarm, in terms of the economy. There was a big culprit, and it had nothing to do with the economy, but with changes in government policy.

The culprit was Social Security. Income from personal transfer receipts plunged by 2.2%, or by an annual rate of $110 billion, in May from April, after having spiked by 2.5% in April from March due to government policy changes that expanded beneficiaries and increased the benefits of some beneficiaries, which then triggered catch-up payments in April. And in May, payments returned to trend.

Conversely, these Social Security catch-up payments had fattened up the increase in total income in April to +0.7%.

Compensation of employees: solid growth. The total of wages and salaries, plus contributions paid by employers to retirement funds and government social insurance rose by 0.4% in May from April, which was exactly average for the past 12 months.

Year-over-year, compensation of employees rose by 4.9%, to a record seasonally adjusted annual rate of $15.7 trillion.

This all-important labor market gauge, which includes wage increases, is growing at a solid pace.

Income from Dividends and Interest has been wobbling along at record levels all year. In May, they were essentially unchanged, at a seasonally adjusted annual rate of $4.0 trillion, up by 1.1% from a year ago.

About half of the income is from dividends and half from interest.

“Proprietors’ income” (income from personally owned businesses and farms) fell by 2.3% in May from the record in April, but that drop only partially undid the big spike in March and April.

Over the three months combined, income rose by 0.5%. Year-over-year, income rose by 2.3%.

The month-to-month drop ($49 billion SAAR) was mostly due to the always super-volatile but minuscule income from personally-owned farms, which fell by $41 billion SAAR in May to a seasonally adjusted annual rate of $42 billion, after big-percentage jumps in the prior months.

Nonfarm proprietors’ income – revenues minus expenses from personally owned small businesses – dipped by 0.3% from the record in April, to a seasonally adjusted annual rate of $2.01 trillion.

All these figures here are annual rates. To get a very rough feel for the actual monthly dollars, divide the dollar figures by 12. That’s obviously not how seasonally adjusted annual rates are figured, but it gives you a very rough feel for the monthly magnitudes.

Rental income of “persons” dipped a hair in May, to a seasonally adjusted annual rate of $1.1 trillion. This was still up 3.9% year-over-year. Rental income reflects revenues from rents minus expenses. This is personal rental income, such as mom-and-pop landlords have.

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