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By the Numbers

Featuring brief segments of economic analysis from our senior economist Michael Bazdarich, PhD.

The economic analysis we previously featured in By the Numbers is now available on the Western Asset Blog. This page will no longer be updated.


Nice May Income Gains Don’t Alter Sluggish Underlying Trends

We learned today that most measures of personal income showed gains of 0.5% in May, reflecting the better payroll job gains for May reported three weeks ago. What we find most interesting is that the May gains fail to make much of a dent in sluggish underlying income growth trends. As seen in the accompanying chart, nominal disposable incomes have grown at only a 3.8% rate since March 2014.1

To hear most analysts tell it, job growth has been buoyant since early-2014. Since then, wage income has picked up, but not total disposable incomes, and the growth in total incomes is only about consistent with the growth in consumer spending seen in that same timeframe.

Why didn’t faster job growth push faster growth in total income? First, much of the job growth was driven by individuals re-entering the workforce once extended unemployment benefits expired in December 2013, and second, tax burdens have been steadily rising.

A January 2015 National Bureau of Economic Research study2 found that 1.8 million new jobs last year can be traced to the expiration of benefits. For those workers, gains in wage income were partially offset by the loss of benefits, so the wage income growth numbers are misleading. Meanwhile, effective individual tax rates have risen from 9.6% at the trough of the recession to 12.3% in May, almost back to the pre-recession norms of 12.5%.

The bottom line is that despite better job growth, personal incomes are not rising fast enough to drive any sustained acceleration in consumer spending. Meanwhile, as seen in the blue line in the chart, even wage income growth has been slowing lately. The nice income gains of May are balanced by more sluggish gains over the previous five months.

Income Growth
Income Growth Chart
Source: Bureau of Economic Analysis. As of 31 May 15
  1. The 6-month growth rate shown there hits 3.8% in September 2014, which indicates that that growth rate held over March 2014 through September 2014, and growth has continued at that rate since.
  2. Hagedorn, Manovskii and Mitman. The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle? National Bureau of Economic Research, Jan 2015. http://www.nber.org/papers/w20884.pdf

Michael Bazdarich

Product Specialist/Economist

Mike brings more than 45 years of experience to his position. "By the Numbers" will address economic data releases that are pertinent to a broad range of investors.

Prior to joining the Firm in 2005, Mike ran his own consulting firm, MB Economics. He earned his PhD in Economics at the University of Chicago.

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