Personal income resumes downward trend, falling 1.3 percent in June

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Back to reality. A month after a one-time stimulus payment to social security recipients boosted income, personal income resumed its recent downtrend in June, falling 1.3 percent, the U.S. Commerce Department announced Tuesday.

Meanwhile, real consumer spending also fell 0.1 percent in June, its third decline in the past four months. Further, the savings rate also dipped, but remained at a high rate, falling to 4.6 percent in June from its record 6.2 percent pace in May.

Economists surveyed by Bloomberg News had expected personal income to fall 1.1 percent in June.

Real income's downward trek continues

Also, real disposable income adjusted for inflation and post-taxes -- basically a measure of Americans' purchasing power -- declined 1.8 percent in June after a 1.5 percent rise in May.

What's more, personal incomes have decreased 1.7 percent since the recession started 19 months ago.

No wage pressure

In addition, compensation for workers, one measure of wage pressure in the U.S. economy, fell 0.3 percent in June --- its eighth straight monthly decline.

However, there was reasonably good news on the inflation front. Although consumer prices increased 0.5 percent in June, the most in 12 months, the core rate -- which excludes the often-volatile food and energy component -- rose just 0.2 percent, in-line with the Bloomberg News consensus. And one can detect the culprit in the June headline inflation statistic: energy prices, which surged 8.3 percent in the month.

Overall, however, inflation remains tame: Consumer prices have actually fallen 0.4 percent in the past 12 months, while core prices are up just 1.5 percent. The above is well within the U.S. Federal Reserve's "comfort zone" for inflation. In fact, the Fed's bias leans toward deflation, not inflation, as being the bigger risk for the U.S. economy, in the next two to three quarters.

Economic Analysis: From a macroeconomic health standpoint, the June personal income data is bad news. Take away last month's special payment to social security recipients, and real wages and income are in a downward trek, which is something you'd expect during a time of slack demand for labor and professional services.

From an investor standpoint, the lack of wage pressure and inflation is good news, but keep in mind that if the consumer portion of the U.S. economy remains the same, real incomes will need to rise for corporate revenue and earnings to advance at healthy rates. Historically, consumer spending accounts for 60-65 percent of U.S. GDP, but it remains to be seen whether that percentage will hold in a restructured U.S. economy.

Finally, the U.S. savings rate, although it pulled back to 4.6 percent in June, remains at a high rate -- it's roughly triple what it was before the recession started. That reflects a continuation of the "frugal consumer" era -- one where belt-tightening, depleted housing and stock market assets, and economic uncertainty have prompted Americans to substantially increase their savings.

In normal times, the high savings rate would be a plus, particularly on the heels of more than five years of below-average savings by Americans: U.S. citizens do need to save more. However, the problem with a high savings rate now is that it takes that many more dollars out of an already commerce-constrained U.S. economy. Unless some other source of demand can be found to fill-in that hole -- exports, for example -- higher savings will lower GDP growth, at least short-term.
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