January Income Increases 11.5%

Real personal income jumped dramatically in January on the back of a new round of stimulus checks. Will an eventual reduction in stimulus mean that consumer spending will contract even faster? Perhaps not if the near record high personal savings rate falls to more recent normal levels.

Steven Kline, Jr.

Chief Data Officer, Gardner Business Media

In January, real personal income was $21,453,852 (millions of USD, SAAR). This was almost an all-time high and only eclipsed by April 2020. In spite of, or because of, the economic lockdowns, real personal income shot up dramatically from its 60-year up trend in April 2020. By November 2020, real personal income had returned to its multi-decade up trend. January 2021 resulted in a similar but smaller spike as April 2020.

Of course, the spikes in real personal income in April 2020 and January 2021 were not due to earned income as millions of people lost their jobs or had their hours reduced as a result of the economic lockdowns. A look at the major components of personal income shows that all of them are still below per-lockdown levels, except for current transfer payments (e.g. stimulus checks, unemployment insurance, etc.). In fact, current transfer receipts doubled in April 2020 from the previous all-time high. And, they are nearly at that level again as Congress debates further stimulus. Clearly, the stimulus through current transfer receipts is more than the income lost through compensation, dividends and interest, proprietor income, and rental income, which is why personal income spiked so much from the multi-decade trend.

In January, current transfer receipts accounted for 27% of all personal income. And, since the lockdowns started, current transfer receipts accounted for a higher percent of personal income than at other times since at least 1960.

Compared with one year ago, real personal income grew 11.5%. This was the second-fastest rate of month-over-month growth since at least 1960. Since the lockdowns started in March 2020, the rate of month-over-month growth in real personal income was historically high.

As a result of the stimulus, the annual rate of growth in personal income accelerated to 5.7% in January. This was the fastest rate of annual growth in personal income since March 1999. However, the rapid growth in income has not translated into accelerating growth in consumer spending. This is unprecedented as shown in the chart below. Typically, income and spending are very closely correlated, with income leading spending by 1-3 months on average.

There is some concern regarding what would happen to consumer spending if/when stimulus is eventually removed from personal income. Will consumer spending contract even faster?

According to the Wall Street Journal, there were 10,000,000 new brokerage accounts opened in 2020. And, there is evidence based on the amounts deposited in those accounts that the opening of these accounts was directly tied to the stimulus checks. Therefore, based on extreme highs in the personal savings rate, which was 20.5% in January, perhaps when stimulus is removed from personal income through a reduction in current transfer receipts individuals will stop saving and start spending again.