Personal disposable income goes up… and it stays there

In the United States, almost three quarters of our GDP comes from consumer spending and business spending, when something is specifically purchased for consumption. High expenditures on consumer goods and services are typically a result of wages and jobs increasing. Ultimately, to meet the demand of increased spending on goods, more jobs are created to keep up with the supply, and so on.

When consumers feel confident in their spending, it impacts the GDP.

So what drives their confidence, more specifically, their spending? Household income and wealth are the biggest forces behind consumer spending, whereas disposable personal income is a subset. It’s the money that’s left over after rent, bills, mortgages, etc.

The personal disposable income indicator tracks how much consumers made available for spending or saving over the last 63 years. Disposable income is measured in billions of US dollars, and it’s represented this way on the graph as opposed to percentages. This data is provided by the U.S. Bureau of Economic Analysis, and it’s updated monthly. In the graph below, 25 years of personal disposable income is measured from September 2000 to August 2022. That’s 23 years.

Within this time frame, personal disposable income has been steadily increasing, including slight peaks in the summer of 2003 and December of 2004. It’s interesting to note that although holiday shopping may explain the spike in disposable income, one would assume to see a similar trend in 2003 and 2005. Increased disposable income for these periods of time may have been a result of the Jobs and Growth Tax Relief Reconciliation Act former President Bush signed in 2003, which is largely known for its tax cuts.

As expected, the 2008 recession is reflected in this graph, where June experienced a peak of almost $11,400 billion, followed by a sharp decline until January of 2009. By the summer of 2009, unemployment was at a high of 9.5%, an increase from 5% in 2007. This explains the downturn of personal disposable income. When consumers are actively looking for jobs, but can’t find one, there are fewer sources of disposable income.

As your eyes move farther along the graph, there’s a noticeable section of peaks, followed by sharp declines. You’ve probably already guessed it, COVID-19 is the culprit. Despite disposable income peaking in April 2020, it was followed by a year-long, decreasing trend. Around the country, businesses, restaurants, shops, entertainment, and virtually anything that required in-person interaction, was shut down, resulting in the loss of jobs for millions of consumers. As mentioned earlier, a reduction in household income meant even less of personal disposable income available.

And yet, within a matter of months, consumers bounced back, hard. Staying inside and prioritizing safety over consumption, was difficult for consumers. Considering how consumer spending dominates the U.S. GDP, you can guess how essential spending is a part of consumer lives prior to COVID.

So in March 2021, personal disposable income peaked at $21.7 billion, the highest it has ever been in the span of these 25 years. This is precisely the month the U.S. government issued stimulus checks of $1,400, resulting in an explosive amount in disposable income available. It was the “pick-me-up” consumers needed after the prior year.

Now, entering 2022, we may still be in a pandemic, but personal disposable income is back on that steady incline once again. Restrictions have been lifted, masks are no longer required in public places, so consumers may feel more inclined to get out and spend.