What Caused the Temporary Spike in Personal Income?
Location: Tokyo
Date: 2013-03-04
The drop in personal income last week got some media
attention, particularly given that it was the largest one-month drop
in 20 years.
USA Today: - Personal income growth plunged 3.6% in January,
the biggest one-month drop in 20 years, the Commerce Department
said Friday. And consumer spending rose just 0.2% with most of
it going toward higher heating bills and filling up the gas
tank.
The income drop was offset by Americans' savings a hefty 2.6%
rise in December. But most of that gain, analysts said,
reflected a rush by companies to pay dividends and bonuses
before income taxes increased on top earners at the start of
2013.
There were spending declines in January for big-ticket items
that last three years or more, like cars and appliances, and
non-durable goods, like clothing and food. Some economists said
the declines could be blamed on a 2% federal payroll tax cut
expired Dec. 31.
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$MM, Source: BEA |
Many immediately attributed this decline to the difference in
dividend income. Companies who paid special dividend before the
year-end generated an artificial one-time jump in personal dividend
income in December. That made January look like a large decline on a
month-over-month basis. It turns out the dividend was indeed a large
portion of the "biggest one-month drop in 20 years". But as the
chart below shows, it wasn't all of it.
Some have attributed a portion of January's decline directly to the
increase in payroll tax and higher social security payments.
However, if one adjusts for all the movements associated with
"government social benefits" (payroll tax, social security, veterans
benefits, etc.), the shape of the personal income trajectory remains
relatively unchanged - in fact the decline in January looks worse.
Anecdotal evidence suggests that just as companies paid special
dividends before the tax regime change, they also paid some bonuses
and other distributions to employees (mostly executives) prior to
the tax increases.
Moreover, it's important to remember that in December it wasn't at
all clear who exactly will pay higher taxes - the discussion
initially was focused on $250K/year and then $400K/year and higher.
That could have impacted a much larger group than the fiscal cliff
compromise ultimately did. Since there is generally some flexibility
around the timing of income recognition, some people tried to shift
as much of it into 2012 as possible. And that generated the
temporary spike in personal income that can't be explained by
special dividends.
When all the dust settles, the reality is that personal incomes are
increasing at around 2% per year or less, just keeping up with the
GDP growth. For now it's simply about muddling through, as near-term
economic growth in the US is expected to remain subdued.
USA Today: - "With tax hikes and spending cuts buffeting
the economy, growth in the first half of the year is likely to be at
a sub-2% pace," James Marple, senior economist at TD Economics wrote
in a note. "At this pace, the unemployment will not improve and
pressure will remain on the Federal Reserve to continue its asset
purchase program."
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