May personal income rose 0.4%, with disposable income up 0.5%, but wage income up less than 0.1%. The gap between growth in total income and wage income is enormous, and, indeed, when one looks at the income details, it becomes clear that the May strength derives from a spike in dividend income.
After declining slightly over the past two years, dividend income jumped 4.8% in May, single-handedly adding 0.3 percentage points to income growth. Dividends account for 6% of personal income, but they contributed 68% of the May increase in income. A similar spike in dividends in February 2015 was fully reversed a month later. Look for a similar reversal next month, thus an especially weak headline income number for June.
Net out dividends, and other income rose only 0.1%, right in line with wage income gains. Meanwhile, the data showed a -0.1% downward revision to April personal income and a -0.2% revision to April wage income. The accompanying chart shows ongoing trends in income growth.
The obvious takeaway from the chart is that income growth is slowing. On a year-over-year basis (YoY), wage income growth has slowed from 6.4% through late-2014 to 2.9% through May. Disposable income growth has slowed similarly, though not quite as sharply. Without the dividend spike, growth in disposable income (green line) through May would have been 3.1%, instead of the 3.6% shown in the chart.
Income growth has slowed in recent years as job growth has slowed. Meanwhile, a much-vaunted acceleration in hourly wages has failed to make any appearance in the aggregate income data.
What you have to look closely to see in this chart is that a month ago, the Bureau of Economic Analysis (BEA) announced a huge downward revision to 4Q16 income growth, basically revising away all the income growth previously reported for 4Q16. This accounts for the sharp 4Q16 dip in income growth. Attendant details suggest that all this downward revision occurred within estimates of hourly wages (not jobs nor hours worked).
Despite buoyant stock prices and consumer sentiment readings, the income data provide a definitive indication that consumer spending is not going to accelerate in the months ahead. Low inflation can prop up consumer demand a bit, but real consumption growth is likely to be stable at best. We believe overall economic growth will similarly continue to come in below Fed and market expectations.