Personal incomes increase, but look beyond the headline number
Personal income is part of the “Income and Outlays Report” put out by the Bureau of Economic Analysis
Personal income is the income a person receives from all sources. This includes wages and salaries, government transfer payments, other labor income, proprietor’s income, and rental income. Increases in personal income drive consumption, which accounts for roughly 70% of the U.S. economy. Personal incomes dropped precipitously during the Great Recession, and it took over two years for incomes to return to their previous highs.
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Wages and salaries increased $13 billion in February, compared to an increase of $17.2 billion in January. Proprietors’ income increased $7.7 billion in February, after increasing $8 billion in January. Rental income increased $3.1 billion compared to an increase of $2.7 billion last month. The rental boom has continued to benefit incomes.
Much of the gain in incomes was due to increases in transfer payments
Unfortunately, much of the increase in incomes was due to increasing transfer payment largely associated with the Affordable Care Act (Obamacare). We saw the same effect last month, as virtually all of the increase in incomes was simply transfer payments. Personal current transfer receipts increased $18.6 billion in February versus $29.9 billion in January. Keep in mind that private wages and salaries grew only $13 billion. So you should really put an asterisk by these personal income numbers for the moment—a big component has nothing to do with economic growth.
We need to see more wage inflation to see growth
Historically, consumption and incomes correlated at around a 50% level. Today, incomes and consumption correlate at something like 95%. This means that in order to see any real GDP growth, we need to see real income growth. That has been difficult to come by with so much slack in the labor market. Increasing incomes will drive consumption, which will benefit commercial REITs like Simon Property Group (SPG), General Growth Properties (GGP), Taubman Centers (TCO), CBL and Associates (CBL), and Macerich (MAC).