Americans’ income and spending drop, despite stimulus

Household disposable income stagnated in September, and spending fell 0.5 percent, the government reported. The figures call into question the strength of the economic recovery.

American households cut spending and saw income stagnate in September, despite a massive government stimulus program propping up their bank accounts.

Personal disposable income decreased 0.1 percent, after adjusting for inflation, the Commerce Department reported Friday. Personal spending fell 0.5 percent, after four months of gains.

The hit to household bank accounts would have been worse without the massive federal stimulus program designed to prop up economic activity. The nation’s inflation-adjusted personal income has been sloping downward during 2009, when government transfer payments are subtracted out. But including the transfer payments – which have risen because of the stimulus efforts since February – total personal income is about where it stood early in the year.

“Households are depending on transfer payments from the government just to stay even,” economists at the investment firm Goldman Sachs wrote in an analysis of the report. “While the downward momentum [in wages] has abated, it has not turned positive. Meanwhile, income on assets – interest and dividends – continues to drop.”

The report raises questions about the strength of the economic recovery that economists believe is now beginning.

Incomes have fallen for many Americans because of unemployment, while others have seen pay raises vanish. In this tough climate, consumers remain reluctant to spend. The end of one government stimulus program – the “cash for clunkers” incentive to buy a car – contributed to the overall weakness in consumer spending.

The concern about consumers helped push stock prices down Friday in morning trading. The news also came as the Obama administration released an estimate that its $787 billion stimulus program has saved or created 650,000 jobs. Critics say the stimulus so far failed to create genuine job growth in the economy.

Many of the stimulus provisions have bolstered disposable incomes, however. Americans are paying less in taxes because of the stimulus, and they are getting more money from programs like Social Security and unemployment insurance.

“Only an increase in government transfer payments prevented an overall decline in incomes,” says economist Nigel Gault of IHS Global Insight, in a written report Friday. “Consumer spending will probably continue to grow, but at a more subdued pace” than the 2.6 percent annual rate seen from June to September.

To some extent, transfer programs naturally go up during recessions, and people naturally pay less in taxes. That’s because of programs linked to economic hardship, such as unemployment insurance, and because a recession drags down taxable income for people who lose jobs or who have stock-market investments. But the stimulus measures this year have added greatly to that typical pattern.

—–

Why are shoppers so lackluster? Incomes are stagnant.