Personal income may have succumbed to an anemic equilibrium in March following months of fluctuations, with forecasters anticipating a slight uptick in Monday’s official report from the Commerce Department.
Due to a tough job market, tax increases and cuts in government spending, personal income is expected to have risen about 0.4 percent in March, according to the median Bloomberg estimate, down from 1.1 percent the previous month. This follows an erratic period that saw a sharp 2.6 percent spike in December and a dramatic 3.7 percent plunge in January.
“Government has been a major drag, first with the expiration of the stimulus, then the tax increases and now with the sequester,” said Scott Brown, chief economist at Raymond James. “We really would have expected the economy to be expanding quite a lot this year.”
Brown initially projected the personal income numbers to be slightly better, estimating a 0.6 percent increase, but he lowered his forecast to 0.5 percent after the release of a disappointing quarterly GDP report on Friday.
GDP growth stood at 2.5 percent during the first three months of 2013, according to the Commerce Department, higher than the 0.4 percent seen the previous quarter, but lower than the projected 3.2 percent.
Much of the shortfall is attributed to the onset of the $85 billion in sequester-related cuts in government spending and the dismal employment picture, which saw a meager 88,000 new jobs produced in March.
“Job growth has been a major weak spot in the economy,” said Joshua Shapiro, chief US economist at Maria Fiorina Ramirez, Inc. “It’s going to weigh on growth going forward.”
Inflation-adjusted disposable after-tax income dropped at an annual rate of 5.3 percent during the first quarter, down from a gain of 6.2 percent the previous quarter and the sharpest plunge since 2009.
None of this bodes well for the expansion of personal income or the overall economy in the months ahead.
The growth of consumer spending is also thought to have stalled at 0.0 in March, according to the Bloomberg median estimate. Despite higher social security taxes, consumer spending rose 3.2 percent in the first quarter, an increase of 1.4 percentage points over the previous quarter. But that boost was fueled in part by a decline in the personal savings rate, as American workers stashed away 2.6 percent of their after-tax income, down about two percentage points from the end of 2012.
“Consumer spending can’t continue to go up with the expiration of the payroll tax cut,” said Harm Bandholz, chief US economist at UniCredit Research. “It will be much, much weaker than in the first quarter.”
Since consumer spending is responsible for roughly 70 percent of the economy, that will constitute a major impediment to growth in the second quarter.
But the jobs picture will remain the principal concern in the months ahead.
“One of the critical variables is the pace of the labor market recovery,” said Shapiro. “It’ll affect everything else.”