TSCO Tractor Supply Company

In March, Personal Income rose 0.5%, up from the 0.4% rise in February, but down from a 1.1% increase in January. The increase was slightly above the consensus expectation of a 0.4% increase. The February number was revised up from 0.3%.

Meanwhile, Personal Consumption Expenditures (PCE) rose by 0.6%, higher than the consensus expectation of a 0.5% rise. That is a deceleration from the 0.9% rise in February but above a rise of 0.5% in January.

The slowdown from February is only because of a sharp upward revision to the February data, which was previously reported as an increase of 0.5%. Of course, if spending is rising faster than income, it means that the savings rate is falling, however in this case not enough (after rounding) to change the savings rate, which remained at 5.5%. But before the revision to February’s spending numbers it was at 5.8%.

The savings rate is well above the dangerously low levels that prevailed from 2004 to 2008. The graph below shows the long-term history of the savings rate (unfortunately not updated with the March data yet at the St. Louis Fed Database).



Over the long run, a higher savings rate is good for the country, and is desperately needed as the savings rate has been in more or less a constant secular decline for the last 30 years. Without domestic savings, we have to borrow from abroad to invest in the economy.

Capital imports are the flip side of the trade deficit. If we sell less abroad than we buy, then we go into debt abroad. That is the same thing as importing capital. The chronically low savings rate has left the country trillions of dollars in debt to the rest of the world.

In the 1960’s and 1970’s the savings rate was normally around 9 or 10%, and started a long secular decline after the 1982-'83 recession. Prior to the 1980’s the U.S was the world’s largest creditor nation by a large margin. Now we are by far the world’s largest debtor. The fall in the savings rate, and the increase in our indebtedness is not a coincidence, it is a causal relationship.

The extraordinarily low savings rates in the five or six years leading up to the Great Recession were a disaster for the country, even though it made things seem good at the time. A falling savings rate can give a very powerful boost to the economy, but only as long as it continues to fall. A low savings rate undermines the long-term economic strength of a country.

In effect, it is a country having a feast on its seed corn. We are paying the price for that now.

In the short run, on the other hand, a rising savings rate slows economic growth, and vice versa. If someone gets a raise but does not spend more, then that raise does not stimulate other economic activity. If the raise is not spent, then there is no increase in aggregate demand. It either increases future potential demand, or pays for demand that occurred in the past (i.e. debt is paid down).

On the other hand, if people are socking away less than they were for a rainy day, it increases current demand. If people go out to eat rather than stay home, it means that there is more work for waiters and cooks.

Will Savings Rate Stabilize?

The question is, will the savings rate stabilize here? The desire of consumers to sit on their wallets and not spend increases in income is very understandable. The collapse of housing prices destroyed trillions of dollars of wealth. That wealth people had been planning on using to finance their retirements or put the kids through college.

Housing wealth is (or at least was when the country still had it) far more “democratic” than stock market wealth. Personal housing wealth does not form the basis for large plutocratic fortunes. It is the stuff of which modest middle class nest eggs are made. Now that money has to be replenished the hard way, by spending less than you earn. Note how the savings rate tends to rise during recessions. That might seem counter-intuitive, since it is very hard to save when you are unemployed, but it really isn’t.

"The Paradox of Thrift"

The very fact that more people decide to save is one of the reasons recessions are, well recessionary. While on an individual basis, being thrift is a good thing, and so is paying down your debt. However, if everyone decides to do it at the same time, it is a very bad thing. This is what Lord Keynes called “The Paradox of Thrift.” It is the change in the savings rate, not the level that causes the pain.

We need more domestically formed capital rather than relying on importing capital from abroad.  Importing capital is the flip side of running a trade deficit.

The rise in the savings rate during the Great Recession was very rapid, and was one of the key reasons the recession was so severe. We are still a long way from the sort of savings rate we had back in the 1960’s and 1970’s, but we are a lot closer than we were a few years ago.

Slowly people are making progress on repairing their balance sheets, but the damaged caused by the financial meltdown of 2008 and the resulting Great Recession was catastrophic. The process is being undermined by the resumed decline in housing prices. That decline in wealth does not show up in the savings statistics, but savings have to compensate for it.

Components of Personal Income

The components of Personal Income are as important as is the total number. The unusually large jump in January was primarily due to the change in the payroll tax. In total, personal income rose by $67.0 billion, a nice increase from the rise of $53.1 (revised from $38.0) billion in February (seasonally adjusted annual rates, as are all the subsequent numbers on the components of personal income).

In March, private sector wages rose by $18.0 billion, down from a $23.9 billion increase in February. However, there was a big upward revision to the February number, they were originally reported as an increase of $16.4 billion.

Wages in the goods producing sector rose by $6.2 billion in February, up sharply from a $1.0 billion increase in February. February was revised up from a decline of $1.0 billion. Wages in the private service sector were up $11.8 billion versus an increase of $22.9 billion in February (revised up from $17.4 billion). Overall government wages rose by $1.2 billion after rising $0.4 billion in December.

Private wages and salaries are the most important, and highest quality, form of personal income. Government wages have to be paid out of either taxes or government deficits. Government workers do, however, spend their money in the private sector, just like private sector workers do. To keep the numbers in perspective, total private sector wages are 4.54x larger than total government wages.

Proprietors' Income

Another important source of personal income is proprietors’ income. In other words, what the self-employed and small businesses were earning. That increased by $4.4 billion in March, down from a $6.5 billion rise in February (revised up from an increase of $2.5 billion). Farm proprietors incomes rose by $1.6 billion, matching a $1.6 billion increase in February (revised up from a $0.5 billion increase).

Strong commodities prices have led to a stunning increase in farm incomes. Farm proprietors' incomes have risen every month over the last year. The report only shows the data back to last August, but since then, farm incomes are up 27.4%.

The overall strength down on the farm helps explain why the Great Plains states like the Dakotas and Nebraska are weathering the downturn so much better than the rest of the country. It is also a good sign for firms that are tied to the farm economy, such as Deere (DE). Tractor Supply (TSCO) and Potash (POT). It also suggests that perhaps Willie Nelson needs to find a different recipient for his charity concerts.

Non-farm proprietors income rose by $2.9 billion, down from a $4.8 (revised up from a gain of $2.5 billion) billion rise in February. In other words, what we normally think of as small business income is showing signs of getting back on track, but is hardly booming the way farm income is. Farm proprietors income is tiny relative to non-farm at just $61.8 billion versus $1.0423 trillion.

Since August, non-farm proprietors income is up a nice, but hardly exciting 2.9%. Non-farm proprietors income actually peaked back in December of 2006 at $1.1129 trillion, so small business income is still 6.3% below peak levels. On they other hand, it bottomed out in May 2009 at $971.6 billion, so we are now 7.3% above the valley floor.

Other Sources of Income

Rental income rose by $8.7 billion in January, up from an $8.1 billion (revised from $8.3 billion) increase in February. Rental income has increased every month since November 2009. Given the still-weak condition of the real estate market, this is somewhat surprising, but a sign that it is slowly on the mend. Since August, rental income is up 10.1%.

Capital income, or income from dividends and interest, rose by $8.9 billion after it rose by $7.7 billion in February (unrevised). This income is particularly important to retirees. While interest rates are still very low by any historical measure, they have increased over the last few months, most notably longer term t-notes. Interest income rose by $0.8 billion in March matching its February rise. Since August, personal interest income is up 2.9%.

Dividend income rose by $8.1 billion on top of an $8.6 billion increase in February. Dividend income can be a bit erratic month to month, but the general trend seems to be upwards, since August total dividend income is up by 5.2%. The decision to allow most of the “too big to fail” banks to substantially increase their dividends means that dividend income is likely to continue rising nicely over the next few months. The decision was however, very ill advised from the point of view of banking system soundness and safety.

Transfer Payments

The final big component of personal income is government transfer payments. Like government salaries, this source of income has to come from either taxes or increased deficits and so it is a less desirable source of personal income from the point of view of the economy as a whole.

However, it is still income that gets spent in the economy. Wal-Mart (WMT) really doesn’t care if the money spent in its stores is from the elderly using their Social Security checks or the dividends they get from their investments, or really if it is retirees shopping there or people still in their working years spending their wages there, or their unemployment benefits. Transfer payments rose this month by $24.1 billion, up very sharply from a $6.2 billion in February (revised up from a $1.1 billion increase).

Over the long term, though, the economy cannot simply grow through ever increasing amounts of money being handed out by the government. Those payments are very useful in the short run to help hold up overall consumer spending when the economy has turned soft, but in the long run, the economy needs income from wages and salaries, and from small businesses earning profits. It is those earnings and profits that pay the taxes that support the transfer payments.

It is then worth looking at personal income excluding transfer payments, as shown in the second graph. Since it is a long-term graph, inflation plays a much bigger role over time, and the graph is based on real personal income rather than nominal (which the rest of the numbers in this post are based on).

Not that during most recessions (and the immediate aftermath) incomes excluding transfer payments flatten out, but do not fall significantly. The Great Recession was very different in that regard with income ex transfer payments falling by 6.67%, in real terms, between 12/07 and 10/09. We are now starting to see a very tentative recovery in it, up 4.18% from the 10/09 low (unfortunately the chart is not updated with the March data).



Postive Report Overall

Overall, I would have to rate this report as positive. Income was up more than expected, the overall quality solid, although not as good as last month and the revisions to last month were solidly positive. The declining support from transfer payments is fairly significant if one takes a step back.

The increase in transfer payments so far this year just 11.2% of the overall increase in Personal Income. For all of 2010, total personal income rose by $371.8 billion, of which $163.8 billion, or 44.0% came from increases in transfer payments. The quality of the income growth has improved significantly, although in March alone, transfer payments were responsible for 36.9% of the increase.

Aside from the payroll tax effect in January, the increase in personal income so far this year is coming from sustainable sources like higher wages and salaries, most notably from the private sector, and from higher proprietors incomes. In other words, small businesses are starting to do better, even non-farm small businesses.

Growth in dividend income is likely to continue as firms share their strong earnings growth with their shareholders. It should get a big boost in the next few months due to the increased dividends that the recently bailed out banks are going to be paying. The fall in the savings rate is bad over the long term, but is helpful right now in getting the economy back up closer to potential.

Spending Side Also Positive

On the spending side the report was also positive, rising 0.6%, down from 0.9% increase in February, but that is only after a big upward revision from the originally reported 0.5% increase. It was also above the 0.5% rise that was expected. Of the total $60.7 billion increase in spending, $1.1 billion of it went to durable goods, and spending on services rose by $38.5 billion.

Spending on non-durable goods, such as food and gasoline, was up by $21.1 billion. In February, the total increase was $94.4 billion, and spending was much more balanced. Durable goods spending rose by $24.3 billion, non-durables by $40.4 billion and $28.8 billion on services.

The very sharp drop off in spending for durable goods relative to spending on non-durables and services is a bit disconcerting, as spending on non-durables is not as influenced by consumer confidence. Those tend to be necessities like food and gasoline, and much of the increases there may simply be a reflection of higher food and gasoline prices.

The better-than-expected numbers for March, and the upwards revisions for February suggest that when the revision to first quarter GDP comes out, it will be revised up from the 1.8% growth reported yesterday.
 
DEERE & CO (DE): Free Stock Analysis Report
 
POTASH SASK (POT): Free Stock Analysis Report
 
TRACTOR SUPPLY (TSCO): Free Stock Analysis Report
 
WAL-MART STORES (WMT): Free Stock Analysis Report
 
Zacks Investment Research