The Latest Income Report Screams Deflation

Inquiring minds are digging into the just released Personal Income and Outlays Report for August 2011.

Personal Income

Personal income decreased $7.3 billion, or 0.1 per cent, and disposable personal income (DPI) decreased $5.0 billion, or less than 0.1 per cent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $22.7 billion, or 0.2 per cent. In July, personal income increased $17.1 billion, or 0.1 per cent, DPI increased $14.4 billion, or 0.1 per cent, and PCE increased $76.6 billion, or 0.7 per cent, based on revised estimates.

Real disposable income decreased 0.3 per cent in August, compared with a decrease of 0.2 per cent in July. Real PCE decreased less than 0.1 per cent, in contrast to an increase of 0.4 per cent.

Wages and Salaries

Private wage and salary disbursements decreased $12.2 billion in August, in contrast to an increase of $23.8 billion in July. Goods-producing industries’ payrolls decreased $1.3 billion, in contrast to an increase of $6.3 billion; manufacturing payrolls decreased $2.9 billion, in contrast to an increase of $5.8 billion. Services-producing industries’ payrolls decreased $10.9 billion, in contrast to an increase of $17.5 billion. Government wage and salary disbursements increased $0.4 billion, in contrast to a decrease of $1.8 billion.

Real DPI, real PCE and price index

Real DPI — DPI adjusted to remove price changes — decreased 0.3 per cent in August, compared with a decrease of 0.2 per cent in July.

Real PCE — PCE adjusted to remove price changes — decreased less than 0.1 per cent in August, in contrast to an increase of 0.4 per cent in July. Purchases of durable goods increased 0.1 per cent, compared with an increase of 2.2 per cent. Purchases of nondurable goods decreased 0.4 per cent, compared with a decrease of 0.5 per cent. Purchases of services increased 0.1 per cent, compared with an increase of 0.4 per cent.

PCE price index — The price index for PCE increased 0.2 per cent in August,compared with an increase of 0.4 per cent in July. The PCE price index, excluding food and energy, increased 0.1 per cent, compared with an increase of 0.2 per cent.

Real Disposable Personal Income Since 1969

Real Disp Income

Real Disposable Personal Income Since 1989

Real Disp Income

Real Disposable Personal Income % Change from Year Ago

Real Disp Income

 The second chart is the same as the first except the time period is smaller to better show the decline in the last recession. Together the charts show an unprecedented decline in real personal income.

The third chart shows percentage change from a year ago. Note how rare it is for this number to cross the zero-line. It is headed there again, following an unprecedented drop in 2008-2009.

Unlike the 1970’s where consumer prices were soaring this decline comes at a time when the Personal Consumption Expenditures Price Index is tame.

Personal Consumption Expenditures (PCE) Price Index

PCE Price Index

The above chart courtesy Personal Consumption Expenditures: Price Index for August by of Doug Short.

It’s Credit that Matters

Inflationists will immediately howl over excluding food and energy from the price index (and they will be right). However, inflationists conveniently ignore the collapse in home prices, instead focusing on the price of a Big Mac.

When energy prices send price index lower (which will happen shortly), the inflationists will conveniently ignore that data as well, preferring to scream inflation when commodities are rising while hiding under a rock when commodity prices fall.

Moreover, and more importantly, focus on prices is silly in the first place because in a credit-based economy it is expansion and contraction of credit that matters, not modest increases or decreases in prices (totally ignoring the plunge in home prices to boot).

Drop in Personal Income Highly Deflationary

With real wages falling and jobs exceptionally hard to get (and keep), this drop in personal income will be accompanied with more unwillingness of banks to lend, and therefore must be considered highly deflationary.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.