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Consumer spending: How can it be so high?

May 20, 2010

By Bill Conerly,
Conerly Consulting
, Businomics,

In the latest issue of the Businomics(r) Newsletter, I displayed this chart, which shows that consumer spending has fully regained the pre-recession peak:

PI C

This has led several people to ask where the consumers have gotten the income to spend.  After all, employment is still well beneath its previous peak.  So let’s go through the process, using data available from the U.S. Bureau of Economic Analysis.  (I’m going to be using data not adjusted for inflation, but the inflation adjustment is relatively small these days.)

Here’s total personal income:

PI PI

It has not regained its prior peak, but it’s not as weak as employment, thanks to the non-labor income component of personal income:

PI nonLabor

The big gainer within this category is transfer payments, primarily social security and unemployment insurance.

Taxes have dropped in the recession.

PI Tax

As a result, disposable income (income minus tax payments) has indeed risen:

PI DI
It’s not a huge gain, but neither is the increase in consumer spending I was trying to explain.

  
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Discuss this article

Bob Clark May 20, 2010

It’s surprising how much non labor income is to labor income. About a 5 to 8 ratio. Probably this ratio was a lot, lot lower in the 1930s.

Still I am kind of worried about a second leg to the current Great Recession, seeing how unemployment claims are back up towards 500k, Europe and China are both in slow downs, and the Bama administration seems to be bogging down the economy in a wrath of new regulations and tax schemes.

Cross fingers.

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