The Bureau of Economic Analysis (BEA) released Personal Income and Outlays data for January of 2023 today.
Chart Notes
- DPI stands for Disposable Personal Income
- Disposable Income means income after taxes
- PCE means Personal Consumption Expenditures, consumer spending
- Real means inflation adjusted by the PCE Price Index, not the CPI
Transfer Payments
Transfer payments are redistributions of money for which there are no goods or services exchanged.
Social Security, Medicare, Medicaid, and food stamps (now called SNAP) are examples of transfer payments.
Real Income Less Transfer Payments (RILTP) is part of what the NBER looks at when determining recessions. RILTP has been weak.
Real PCE Three Ways
Both goods and services spending took a huge leap in January. Income does not support this spending.
Real Income and Spending
I added a new line to that chart today, Real Personal Income Excluding Transfers.
Government handouts have kept the economy going, at the expense of a rise in inflation.
Let’s hone in on that idea.
Real Disposable Personal Income Chart Notes
- Real PCE went from 13,314 pre-Covid to 14,341, a rise of 7.7 percent
- Real DPI went from 15,233 pre-Covid to 15,568, a rise of 2.2 percent
- RPI Excluding Transfers went from 14,414 pre-Covid to 14,745, a rise of 2.3 percent.
Those numbers are over nearly a 3-year period.
Spending has risen about 5.5 percentage points more than income over a nearly three-year period. This behavior will not last and it will be instant recession as soon as it happens.
This assumes we are not already in recession although there is strong evidence that we are.
Recession When?
This morning I commented Significant Negative GDP Revisions for 2022 Q4 Are Consistent With Recession
Numbers to Watch
GDP was revised lower to 2.7 percent. But the bottom line estimate is Real Final Sales (RFS) at 1.2 percent.
The difference between Real GDP and RFS is inventory adjustment that nets to zero over time.
RFS to private domestic purchasers was a mere 0.1 percent. The rest was an inventory build and an increase in government spending.
Industrial Production
Note that Industrial Production Much Weaker Than Expected, With Negative Revisions Too
As I have commented many times, heading into recessions the revisions will tend to be heavily negative.
Coming out of recessions will tend to be positive.
Money Supply
Money supply also suggests recession.
For discussion, please see Comments From Lacy Hunt on the Fed’s Current Money Supply Numbers
Long Period of Weakness
Data is consistent with a weak recession. That has been my forecast all along.
On August 19, 2022, I wrote Expect a Long Period of Weak Growth, Whether or Not It’s Labeled Recession
That’s still my call. We may flirt in and out of recession or near-recession for years.
Unlike others I do not see a huge rise in the unemployment rate. And if not, data will keep the Fed higher for longer than many think, also contributing to overall weakness.
This post originated at MishTalk.Com
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Mish
Our economic indicators are not designed for the environment we are in. The last inflation period that resembles our own last occurred in the 1970’s but the indicators we use to see where we are and where we are going were fashioned in the 80’s, 90’s and early 2000’s when inflation in goods and services was abnormally moderate. Using tools made for a low-inflation environment to describe a high-inflation one is causing the indicators to give us contradictory signals making them much less useful. Mish’s reworking of the data is a very good effort to make sense out of this confusion and I salute him for it. He does help a lot by stripping away the irrelevant from the relevant.
I try to keep things simple. Inflation high makes Fed raises rates and shrink its balance sheet = money coming out of the economy = bad markets so go on vacation.
Daniel L. Thornton, May 12, 2022 agrees with me:
“However, on March 26, 2020, the Board of Governors reduced the
reserve requirement on checkable deposits to zero. This action ended the Fed’s
ability to control M1. In February 2021 the Board redefined M1 so that M1 and
M2 are very nearly identical. Consequently, it makes little sense to
distinguish between them. In any event, the checkable deposit portion of M2
cannot be controlled now because there are no longer reserve requirements on
these deposits. Here is the reason the Fed cannot control these deposits.”
Some Thoughts About Inflation and the Feds Ability to Control It.pdf (dlthornton.com)