April 2015 Personal Income Data

Today we received April 2015 personal income data. We decided to take some time to share with readers some of our takeaways.

1. Wage Inflation Generally: While wage growth is trending positively, wage inflation does not appear to be a concern. Total NOMINAL wage growth was 4.6% in April 2015, in line with the trailing 3 month average. Wages have been growing between 4.0-5.7% y/y since January 2014. Nominal wage growth remains lower than it was during the internet boom time of 1995-2000:

-7.5%

-2.5%

2.5%

7.5%

12.5%

17.5%

Wages and Salaries (Govt and Private) Nominal, Y/Y Change

Wages and Salaries Nominal, Y/Y Change

Average

From a REAL perspective, wage growth has meaningfully accelerated:

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Wages and Salaries (Government and Private Sectors), Real, Y/Y Change

Total Wage Growth, Real, (1960-Present) Average

That said, consumer’s confidence in the future (red line, below) remains within a 15 month trend despite the increase in real wages indicating that consumers potentially do not expect the recent increases in real wages as long lasting:

0

20

40

60

80

100

120

140

160

1/1/

2007

4/1/

2007

7/1/

2007

10/1

/200

7

1/1/

2008

4/1/

2008

7/1/

2008

10/1

/200

8

1/1/

2009

4/1/

2009

7/1/

2009

10/1

/200

9

1/1/

2010

4/1/

2010

7/1/

2010

10/1

/201

0

1/1/

2011

4/1/

2011

7/1/

2011

10/1

/201

1

1/1/

2012

4/1/

2012

7/1/

2012

10/1

/201

2

1/1/

2013

4/1/

2013

7/1/

2013

10/1

/201

3

1/1/

2014

4/1/

2014

7/1/

2014

10/1

/201

4

1/1/

2015

4/1/

2015

Consumer Confidence (2007-Present): Present Conditions versus Future Expectations

Present Situation Future Expectations

2. Wages on a Per-Payroll Employee Basis: Nominal wages per payroll employee sit well below the long term average, again indicative of a lack of wage inflation:

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Wages/Payroll Employee, NOMINAL, Y/Y

Wages/Payroll Employee, Nominal, Y/Y Average

On a REAL basis, wages per payroll employee decelerated a bit but overall remains strong:

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Wages/Payroll Employee, REAL, Y/Y

Wages/Payroll Employee, REAL, Y/Y Average

3. Disposable Personal Income Growth Remains Slow: Disposable personal income on a nominal basis remains quite low, again indicating a lack of inflation:

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Disposable Personal Income, Nominal, Y/Y

Disposable Personal Income, Total Average

4. Personal Consumption Expenditures as a Function of Employment Growth: On both a NOMINAL and REAL

basis, consumption remains quite tepid relative to the job growth we are seeing and is well below what we saw during the internet boom. In fact, on a nominal basis, consumption relative to employment is at levels last seen in 2008:

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Personal Consumption Expenditures, Nominal Deflated by Non-Farm Payrolls

Personal Consumption Expenditures, Nominal Deflated by Non-Farm Payrolls Average

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Personal Consumption Expenditures, Real Deflated by Non-Farm Payrolls

Real Personal Consumption Expenditures Deflated by Non-Farm Payrolls Average

5. Savings Rate: As this note predicted back in November 2014, the savings rate has increased dramatically over the last few months leading us to believe that consumers have decided to allocate money that had been spent on energy towards savings. An increasing savings rate is not the hallmark of increasing inflationary pressures:

Date Disposable Personal Income Personal Outlays Savings Savings Rate

12/31/2008 10,941.4 10,230.2 711.2 6.50%4/30/2013 12,412.5 11,779.5 633.0 5.10%5/31/2013 12,471.2 11,822.7 648.5 5.20%6/30/2013 12,528.4 11,864.4 664.0 5.30%7/31/2013 12,532.6 11,893.4 639.2 5.10%8/31/2013 12,588.7 11,921.5 667.2 5.30%9/30/2013 12,636.2 11,979.1 657.1 5.20%10/31/2013 12,611.2 12,018.5 592.7 4.70%11/30/2013 12,635.1 12,088.9 546.2 4.32%12/31/2013 12,624.8 12,101.6 523.2 4.14%1/31/2014 12,698.5 12,081.2 617.3 4.86%2/28/2014 12,771.3 12,132.7 638.6 5.00%3/31/2014 12,849.0 12,226.6 622.4 4.84%4/30/2014 12,891.7 12,243.3 648.4 5.03%5/31/2014 12,943.2 12,283.1 660.1 5.10%6/30/2014 13,000.7 12,342.3 658.4 5.06%7/31/2014 13,028.6 12,370.5 658.1 5.05%8/31/2014 13,068.4 12,448.0 620.4 4.75%9/30/2014 13,086.5 12,480.5 606.0 4.63%10/31/2014 13,134.2 12,536.2 598.0 4.55%11/30/2014 13,182.0 12,582.2 599.8 4.55%12/31/2014 13,225.9 12,562.3 663.6 5.02%1/31/2015 13,247.5 12,522.8 724.7 5.47%2/28/2015 13,304.1 12,542.2 761.9 5.73%3/31/2015 13,304.6 12,612.1 692.5 5.20%4/30/2015 13,353.4 12,609.4 744.0 5.57%

Households, on average, are now saving over $6,000, equal to 12% of the average household income of $50,000. As it is unlikely that the average family is able to save 12% of their income (the current savings rate applied to the average income is roughly $2,800), savings must be skewed to the highest earners:

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1q65

4q66

3q68

2q70

1q72

4q73

3q75

2q77

1q79

4q80

3q82

2q84

1q86

4q87

3q89

2q91

1q93

4q94

3q96

2q98

1q00

4q01

3q03

2q05

1q07

4q08

3q10

2q12

1q14

Annual Savings/Household, Level Data (1965-Present)

Annua l Sa vings/Household, Leve l Da ta (1965-Pre sent)

With the average household theoretically savings $2,800 per year, one can understand why credit is so vital to a home purchase. The median price of an existing home sold in the US in April 2015 was $265k. A 20% down payment would require $53k equal to 19 years of savings using the current savings rate.

We believe a more accurate portrayal of the savings rate is encapsulated by the chart below. While the overall savings rate (blue line) is 5.7%, if we exclude government transfers (red line), the savings rate is roughly -15%. Similarly, if we exclude supplements to wages (green line), 2/3 of which consists of actual and actuarial contributions to pensions, the savings rate is roughly -7% (we do not know how much are actual and how much are actuarial contributions but this distinction is clearly important as the former is a cash flow item while the latter is not). Said another way, if you don’t receive a pension or government transfer, you likely have a negative savings rate:

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Savings Rate and Adjusted Saving Rates

Savings Rate, Reported

Savings Rate, Excluding Government Transfers

Savings Rate, Excluding Supplements to Wages

Savings Rate, Excluding Government Transfers and Supplements to Wages