Springtime in America
by David on June 9th, 2009
As an ordinary American, wondering if you can keep your job or make your mortgage payment, you may be surprised to learn that the recession is almost over. But, this is what the economists are telling us. All the indicators, they say, now point to recovery. One on the key data series showing better days ahead is Personal Income and Outlays, released monthly by the Bureau of Economic Analysis. Earlier this week, the BEA reported that American’s disposable personal income rose 1.1% in April to $10.91 trillion on an annualized basis. That’s a big jump, but let’s look at the details to see if it really is a harbinger of spring.
Collectively, personal income has five components, shown below as percentages for April:
As you can see, the biggest contributor by far is employee’s compensation, but that’s not the source of April’s increase. Rather it can all be found in higher government transfer payments and lower taxes.
According to the BEA, “Provisions of the Federal Additional Compensation Program of the American Recovery and Reinvestment Act of 2009 boosted the level of personal current transfer receipts by $11.8 billion at an annual rate in April.” What a mouthful, but, hey, $11.8 billion is a lot of money! Except what it actually translates to is an extra $25 a week if you are collecting unemployment insurance.
Much bigger contributions came from tax reductions. The Making Work Pay Credit provision of the Act reduced personal current taxes by $49.8 billion at an annual rate in May. This provision allows a refundable tax credit of up to $400 for individuals and $800 for working couples. Reductions in payroll taxes added $63.6 billion (again, annualized) to May income.
What did we do with this bounty? Answer: We saved it; that is, we didn’t spend it. The BEA calculates the savings rate by subtracting personal outlays from disposable personal income. Putting $100 in the bank counts as saving, but so does paying off your credit card bill. Using this definition, the rate of US savings as a percentage of disposable income rose to 5.7%, the highest since 1995. Spending actually decreased 0.1% from March, and spending, not saving, drives the economy. Also, a little suspicion about the permanence of tax reductions might be warranted, with the Federal budget deficit spiraling into the trillions and only a handful of states able to balance their budgets.
Still, there are powerful signs that a recovery has begun. The Dow Jones Industrial Average has gained more than 2100 points or 33% since hitting its low early in March. Globally, commodity prices are soaring as is industrial production in China. In the US, long-term interest rates are rising because bond traders have started worrying about inflation, which can accompany strong economic growth. As result, the average rate for new 30-year mortgages jumped to 5.29% last week, from a low of 4.78% a month ago. I’m feeling better already. Aren’t you?
Tags: community development, economic predictors, financial crisis, green banking, ShoreBank, triple bottom line
