A young woman trying to manage household bills. (Photo by In Pictures Ltd./Corbis via Getty Images)
American consumers have been the backbone of the post-pandemic recovery, but they are losing their ability to sustain their pace of spending. Signs of weakness were evident earlier in the uneven pace of spending growth. Now in the Commerce Department’s report on household income, matters have become clear. Households are already sacrificing savings flows just to keep up current rates of spending, much less to expand them. The future cannot help but see spending slowdowns and likely cutbacks that will slow or halt the overall pace of economic growth.
Top line income figures still look good. A continuing robust pace of hiring and decent wage growth have so far this year pushed allowed income from paychecks to almost keep up with high rates of inflation. It has risen at a 8.4% an annual pace. Proprietors’ incomes have lagged, growing at only a 5.0% annual pace. Evidently, rising costs have eaten away any gains these businesses might have enjoyed from rising prices. Farmers have seen their incomes explode at an astronomical 187.3% annual rate, benefitting from both the general rise in food prices and the special price boost due to the shortfall of Russian and Ukrainian grain shipments. Of course, farmers are a small part of the total, so this surge has a small impact on the overall income tally.
In this cursory picture, things still look good, but this is far from the whole story. Investment income has taken a hit, growing at only a 2.3% annual rate so far this year, far behind inflation. Despite the impulse to dismiss such a shortfall as a problem for the (undeserving) “rich,” investment income mostly concerns retirees who count on it for the necessities of life. It usually constitutes between 13% and 15% of all household income, so the shortfall here matters on both accounting and on human grounds. Transfers from Government transfers have also lagged. These typically constitute between 18% and 20% of total household income. To be sure, payments under Social Security, Medicare, and Medicaid continue to grow at close to the pace of inflation, but dollar flows from unemployment insurance have slowed, happily because of jobs growth, while Covid emergency payments have fallen by more than half.
Taxes have cut deeply into what households have for spending. With the surge in hiring and wages, payroll tax collections have increased disproportionately, rising at a 9.5% annual rate so far this year and taking quite a chunk out of how much gross income is available for spending. At the same time, income taxes have also increased disproportionately. Because this country’s progressive tax system takes at an increasing rate from each additional dollar of income these have risen at a 35% annual rate.
Taking all these considerations into account, overall after-tax household income, what the Commerce Department refers to as disposable income, has grown at only a 0.8% annual rate so far this year. And since that pace of expansion trails far behind the rate of inflation, real disposable income has declined during this time at something close to a 5.5% annual rate. This is not the stuff of a continued consumer spending boom of the sort that has typified the economy for the last 18 months or so.
The extent of strain on household budgets is evident in what has happened to savings flows. To sustain even the recently slowed pace of consumer spending, households have begun to cut back here. Net additions to savings have fallen off precipitously. At the end of 2021, for instance, households added to their savings at a pace of $1.6 trillion a year setting aside some 8.7% of their total income. As of the latest data, that pace has dropped to $815 billion, only 4.4% of income, an 86.8% annualized rate of cutback. People cannot continue in this way for long. They will have to slow or cut back on their rates of spending.
Anticipated cutbacks should be much less draconian than experienced during the 2008-2009 great recession of painful memory. But the negative direction is nonetheless clear. Spending will slow and at times decline, especially, as seems likely, inflationary pressures will persist for some time to come. Even if the economy gets lucky and avoids recession, experiences what the financial media likes to call a “soft landing,” the impressive pace of the post-pandemic recovery to which all have grown accustomed will slow dramatically during the second half of this year and into 2023.
