Real Per-Capita Disposable Personal Income

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The following perspective is excerpted from a speech given by Federal Reserve Chairman Ben S. Bernanke to the Greater Omaha Chamber of Commerce in Omaha, NB on February 6, 2007. The title of the speech is “The Level and Distribution of Economic Well-Being”. In it Chairman Bernanke discusses trends in real personal disposable incomes and the growing disparity in income in our society:

“The long-term trend toward greater inequality seen in real wages is also evident in broader measures of financial well-being, such as real household income. For example, the share of income received by households in the top fifth of the income distribution, after taxes have been paid and government transfers have been received, rose from 42 percent in 1979 to 50 percent in 2004, while the share of income received by those in the bottom fifth of the distribution declined from 7 percent to 5 percent. The share of after-tax income garnered by the households in the top 1 percent of the income distribution increased from 8 percent in 1979 to 14 percent in 2004 (Congressional Budget Office, 2006). Even within the top 1 percent, the distribution of income has widened during recent decades.”

http://www.federalreserve.gov/boarddocs/speeches/2007/20070206/default.htm

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The following perspective is excerpted from an article published in the Survey of Current Business, a publication of the U.S. Dept. of Commerce’s Bureau of Economic Analysis. The article is titled “Personal Income for Metropolitan Areas for 2005” and was written by BEA Economist David G. Lenze. It was published in September 2006. In it he discusses personal income growth in the U.S. and some of the reasons for income growth or decline in various sectors and regions:

“Personal income growth slowed in 2005 across most of the nation’s metropolitan statistical areas (MSAs), according to the most recent estimates released by the Bureau of Economic Analysis (BEA). In 273 of 361 MSAs (76 percent of all MSAs), growth rates were lower in 2005 than in 2004. On average, personal income grew 5.0 percent in 2005, down from 6.0 percent growth in 2004. Per capita income grew 4.0 percent, compared with 4.9 percent. The MSA averages of personal income growth and per capita income growth both exceeded the 2.9-percent inflation rate, as measured by BEA’s national price index for personal consumption expenditures.

“…. Hurricanes Katrina, Rita, and Wilma sharply reduced personal income growth along the Gulf Coast and Florida’s Atlantic Coast but also boosted income in areas that received large numbers of evacuees. MSAs along the Gulf Coast from Mobile, AL, to Lake Charles, LA, sustained substantial property losses from hurricanes and floods. Although the losses were partly offset by net insurance settlements and Federal assistance provided through the Federal Emergency Management Agency (FEMA), personal income in these MSAs was adjusted downward by $16.3 billion, 20 percent of the region’s personal income before adjustment. Downward adjustments were also made in Hattiesburg, MS, Jackson, MS, Lafayette, LA, and Tuscaloosa, AL.

“The largest adjustment, –$14.6 billion, was made to personal income in New Orleans-Metairie-Kenner, LA. The adjustment represented more than 90 percent of the national total and reduced this MSA’s personal income by 35 percent. Personal income in Lake Charles, LA, was reduced 16 percent, while personal income in Gulfport-Biloxi, MS, Houma-Bayou Cane-Thibodaux, LA, and Pascagoula, MS, was reduced 3 to 5 percent each.

“Personal income was boosted in MSAs that received large numbers of evacuees. Income was boosted by about 1 percent in both Alexandria, LA, and Beaumont-Port Arthur, TX, and by smaller percentages in Houston-Sugar Land-Baytown, TX, Miami-Fort Lauderdale-Miami Beach, FL, and Dallas-Fort Worth-Arlington, TX. “

http://bea.gov/bea/ARTICLES/2006/09September/0906_Metro.pdf

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The following is excerpted from a speech given by Federal Reserve Vice Chairman Roger W. Ferguson, Jr. at the commemoration of Black History Month at the Johns Hopkins University Applied Physics Laboratory in Laurel, MD on February 24, 2006. In it he discusses the correlation between higher education and higher personal income, especially for people of color:

“[T]he link between education and individual economic success is well documented. An investment in education is associated with a higher probability of employment. For African Americans, a college degree can substantially narrow the longstanding gap between their labor market experiences and those of whites. Last year, for example, when the national unemployment rate averaged 5.1 percent, the jobless rate for black adults (25 years and older) with a bachelor's degree or higher was 3.5 percent; for white adults, the jobless rate was 2 percent. For persons with only a high school diploma, both the rates of joblessness and the disparity between the rate for blacks and that for whites were greater: an unemployment rate of 8.5 percent for blacks versus 4 percent for whites.

Perhaps more indicative of the economic value of education, workers with college degrees earn an education premium, and that premium has risen over the past twenty-five years. Most economists have found that an additional year of schooling typically raises an individual's earning power between 8 and 15 percent. Recent studies show that four years of college boost earnings about 65 percent.”

http://www.federalreserve.gov/boarddocs/speeches/2006/20060224/default.htm

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The following perspective is excerpted from an article titled "Saving, Wealth, Investment, and the Current-Account Deficit" by BEA economist Marshall B. Reinsdorf. It was published in the BEA News Release Personal Income and Outlays on September 30, 2005. In it he discusses falling savings rates as a percentage of disposable personal incomes in the context of the national income and product accounts:

"In the national income and product accounts (NIPAs), personal saving as a percentage of disposable personal income has trended downward since peaking at 11.2 percent in 1982. In 2004, the personal saving rate was 1.2 percent, or $102.1 billion out of $8,634.0 billion in disposable personal income. The declining saving rate has spawned much concern among economists and policymakers about the consequences of such low saving, which, in the view of some, include reliance on unsustainable levels of external financing for the nation's investment needs, and increased exposure of domestic financial markets to external factors.

Personal saving is the portion of personal income that is not spent on current consumption but that is instead used to provide funds to capital markets or invested in real assets such as residences. It is a component of gross national saving, along with undistributed corporate profits (business saving), government saving, and consumption of fixed capital (a depreciation charge).

Net national saving represents the amount of net income from current-period production that is left over after all consumption-related expenditures. This amount is available to finance net domestic investment in fixed capital assets (such as structures, equipment, and software) or in inventories. Economic growth and rising productivity are possible only with adequate levels of investment, and investment must be financed by saving from some source. Capital gains and losses, which reflect changes in the prices of already existing assets, are excluded from the NIPA definition of saving. Clearly, unrealized capital gains provide no funds for investment. Realized capital gains are also not a source of funding for investment, because the funds that the seller adds to the pool of saving are offset by the funds that the buyer has withdrawn from that pool.

In contrast to the persistently downward trend of personal saving, in 2001-2004, saving by business grew strongly. Saving by government fell; the fall exceeded the decline in personal saving. In aggregate, net national saving fell to 2.1 percent of national income in 2004 from a peak of 7.3 percent in 1998. However, net domestic investment rebounded from a cyclical trough in 2002 to a level near its 20-year average in 2004; therefore, the gap between U.S. saving and U.S. domestic investment widened. This gap was bridged by net national borrowing, which represents saving by the rest of the world that is used to finance domestic investment. The excess of the Nation's spending over the Nation's income can also be measured by the current-account deficit, which equals the combined deficit with the rest of the world on trade, income, and current transfers. The downward trend in personal saving in the NIPAs is confirmed by a measure of personal saving in the Federal Reserve Board's flow-of-funds accounts that is conceptually consistent with the NIPA measure. This measure estimates personal saving as the difference between net purchases of financial assets and real estate by persons, plus net amounts invested in business partnerships and sole proprietorships, less net increases in personal debt.

The decline in personal saving has led to much discussion of the 'wealth effect,' the tendency of consumers to spend more when their assets appreciate. In 2004, personal net worth rebounded to 5.6 times disposable personal income as a result of realized and unrealized capital gains on real estate, corporate equities, and mutual funds. Some of the capital gains on real estate in recent years have been used to support additional mortgage borrowing, which may have reduced personal saving, and some capital gains on pension plan assets have been used to pay pension benefits, which also may have reduced the NIPA measure of personal saving. The Bureau of Economic Analysis is working on integrated saving and wealth accounts that will include information on capital gains and losses."

http://www.bea.doc.gov/bea/newsrel/pinewsrelease.htm

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The following perspective is excerpted from a speech given by Federal Reserve Governor Donald L. Kohn at the Federal Reserve Bank of Philadelphia's Monetary Seminar in Philadelphia on September 24, 2003. In it he discusses how consumer confidence in the economy is a powerful factor in determining future growth:

"To the extent that the productivity increases of the past few years are resulting from businesses learning how to use existing technologies and capital more effectively and from more intense pressure to realize cost savings, productivity gains in the future may not be as large as those experienced recently. If private agents hold this view, expectations of future income and profits would be damped relative to the outsized productivity gains of late, curtailing the indirect effects of those gains on demand. In addition, the perceptions of households and firms about the growth of future income and profits may be heavily influenced by their recent experience, perhaps even more than by the longer-term trends in productivity and potential output that figure so prominently in our economic models. Just as households and businesses may have extrapolated earlier very rapid, but unsustainable, economic growth, it would not be surprising if the recent economic weakness may have led them to expect smaller increases in output and income than will turn out to be justified by underlying trends. "

http://www.federalreserve.gov/boarddocs/speeches/2003/20030924/default.htm