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Dwindling Disposable Income

Macro Minute
October 10, 2023

In last week's post, we discussed signs of a slowdown in household spending. Could the decline in spending reflect weaker income growth? As of August, real disposable personal income (DPI) growth has been negative for the past three months (Figure 1) following 11 consecutive months of gains. This week, I'll dive into the drivers of this decline.

Figure 1: Month-Over-Month Growth in Real Disposable Personal Income

Chart showing month over month growth in real disposable personal income.

Source: Bureau of Economic Analysis via Haver Analytics

To find out what's behind this decline, I break out real DPI into its components. (See Figure 2 below.) Real disposable income can be expressed as the sum of wage and salary income, supplements to wages and salaries, current transfer receipts, asset income, rental income, and proprietors' income net of taxes and contributions to government social insurance.

Figure 2: Components of Real Disposable Personal Income

Chart showing components of real disposable income.

Source: Bureau of Economic Analysis via Haver Analytics

In the latest monthly reading, households continued to see growth in rental income, asset income, and wage and salary income. (See Figure 3 below.) Offsetting that growth, real DPI saw intensified headwinds from higher taxes as well as lower transfer receipts. There were also small headwinds from increased contributions to government social insurance and from a decline in employer benefits (supplements to wages and salaries).

Figure 3: Month-Over-Month Growth of Real Disposable Personal Income Components

Chart showing month over month growth of real disposable personal income components.

Source: Bureau of Economic Analysis via Haver Analytics

Note: Growth in categories marked "Less" is expressed as a negative.

Figure 4 below shows three-month annualized growth rates of real DPI, real DPI less transfers, real personal income ex transfers, and real wage and salary income. We see that:

  • Real wage and salary growth remains positive.
  • Stripping out the effect of declining current transfer payments, real DPI less transfers is still slightly negative because households faced greater headwinds from higher taxes.
  • Taking out both taxes and transfers, three-month growth of real personal income ex transfers remains in positive territory.

Figure 4: Three-Month Annualized Growth Rates of Real DPI Components

Chart showing annualized growth rates of Real DPI components between January 2022 and August 2023.

Source: Bureau of Economic Analysis via Haver Analytics

Steady growth in wage and salary income may bode well for spending. Figure 5 below shows the ratio of personal consumption expenditure to wage and salary income since 2012. Over the past decade, this ratio has been roughly stable, except for the pandemic recession when many businesses were shut down and pandemic health concerns were intense.

The ratio was quick to return to pre-pandemic levels once the immediate pandemic shock dissipated. The stability of this ratio suggests that wage and salary income may be the most important kind of income that households consider when making spending decisions.

Figure 5: Ratio of Personal Consumption Expenditure to Wage and Salary Income

Chart showing ratio of personal consumption expenditure to wage and salary income between January 2012 and April 2023.

Source: Bureau of Economic Analysis via Haver Analytics

With wage and salary income continuing to grow at a steady pace, consumer spending may be more resilient than recent monthly declines in real DPI might suggest.


Views expressed in this article are those of the author and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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