Personal income in largest drop in 3 years

Consumers are spending more even though they have less cash in their pockets as the stimulus wave passes, according to a government report.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Catherine Clifford, staff writer

Most of the Uncle Sam stimulus checks have been sent out. How did you use your rebate?
  • Spent it on essentials
  • Paid credit card debt
  • Added to my savings
  • Splurged on something fun

NEW YORK ( -- Personal income fell in July by the biggest drop in 3 years after surging the prior two months because of $90 billion in economic stimulus payments.

The Commerce Department said Friday that individual income decreased by 0.7% in July after a 0.1% jump in June and a 1.8% increase in May. Economists polled by were expecting income to fall by 0.2% in July.

Economists were expecting a decrease in income following the temporary boost provided by the stimulus checks.

But the sharp decline was the largest drop off since August of 2005, when personal income plunged by 2.3%, according to the Bureau of Economic Analysis.

While personal income fell, disposable personal income sank even further in July. Disposable personal income - which is what consumers have after they pay taxes - fell by 1.1% in July, after a 1.9% tumble in June. In May, however, disposable income jumped by 5.7%, largely due to the initial wave of stimulus checks.

The stimulus program provided consumers with cash to spend, and in general, Americans spent it, boosting the nation's economy. On Thursday, second-quarter gross domestic product was revised up to 3.3% annual growth, after being initially reported at 1.9%, according to the Commerce Department.

But personal spending in July increased by just 0.2%. That was in line with economists' expectations but lower than the 0.6% increase in consumer spending in June.

Inflation concerns: The uptick in consumer spending was primarily driven by higher prices, however. Individual spending, when adjusted for inflation, actually fell by 0.4% in July, after dipping by 0.1% in inflation-adjusted dollars in June, according to the report.

"Apparently, a large portion of the extra money provided by the rebate checks was eaten up by higher prices at the grocery store or siphoned away by higher prices at the gas pump," wrote Mark Vitner, senior economist at Wachovia, in a note Friday.

The government's stimulus program provided temporary relief, but "now we are losing momentum again," added Robert Brusca, Chief economist at FAO Economics. "You have to be concerned about where we are heading."

Another measure in the report that tracks prices that consumers pay on goods and services, excluding food and energy, rose by 0.3% in July over the previous month.

In addition, the core personal consumption expenditures index - a year-over-year inflation gauge that also excluded food and energy - rose by 2.4% in July from the same month a year ago. Core PCE was 2.3% in June. The Federal Reserve is widely believed to prefer that the core PCE stay in a range of 1% to 2%.

Rising inflation is hurting the struggling economy, and posing a dilemma for the central bank. Brusca said that members of the Fed concerned about inflation "will not take much comfort from" the core PCE number.

Looking forward, Vitner said that lower energy costs in August could potentially be good news for inflation.

"Gasoline prices plummeted in August, which should provide some near-term relief to the inflation figures and real incomes," he wrote.  To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.