A Dickens’ Misery
“Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”
Charles Dickens, David Copperfield
Washington discovered, many years ago, that the best time to release bad news was on a Friday afternoon. That’s especially true in the summer when most head off to enjoy the sun and try to stretch those short weekend hours.
Whether by chance or design, the Bureau of Economic Analysis chose Friday to release their latest personal income and spending results. And because of that unfortunate timing, it is doubtful that you heard about this report.
However, I consider this report one of the best summations of where the economy stands. And perhaps one of the best indications of our economy’s direction.
Friday’s report concerns you and me. It is the fundamental report on personal spending and income. And is one of the primary reports the Federal Reserve uses in its monetary policy management.
As you know, ours is a consumer-driven society. Consumer spending represents at least two-thirds of our total economic activity each year. So, analysts watch this report like a hawk.
Now first, the good news. Basic personal income was up in June by 0.6%. Sounds good until the Bureau adjusts those dollars for inflation. Then we see that in inflation-adjusted dollars, revenues declined by 0.3%. While it appears that incomes are increasing, the reality is that our incomes are falling behind the inflation rate.
To give you an idea of the magnitude of inflation’s devastating effect on our income. At the end of 2020, this country’s average per capita income was $52K, of which $5K was strictly due to inflation. Yes, we had inflation two years ago. And yes, it “inflated” our income. But only by $5K.
Today the average per capita income is $55K. But $10K of that is due strictly to inflation. Put another way. Our actual revenues have declined by $2K in just two years! In 2020 our real income was $47K. Today it is $45K.
That’s our income. Let’s look at the other side of our ledger: our expenses.
Remember, income went up by 0.6%, but personal consumption is going up at almost twice that amount: 1.1%. And here’s where many are making a critical misjudgment, in my view.
The nature of consumption in the country is changing dramatically. More and more of what we spend money on is non-discretionary. Items we need to survive are taking a significant chunk of our paychecks. By far, the largest increase in consumption items is fuel and food. About half of all inflation is due to energy costs alone.
As discretionary income declines, we expect this to impact high-end retailers the most. But if these trends of higher energy and food costs continue, we can expect that this will affect the entire retail sector, the most significant component of our nation’s income.
I’ve included the above graph, which shows all of this visually. Red is our expense line, blue our income. You’ll note that since August of last year, our expenses have been exceeding our income. Except for December. Our costs are higher than our incomes, that’s bad enough. But what concerns me is that we’re seeing expenses accelerate while our revenue declines.
As Charles Dickens would put it, we’re in for some absolute misery.