U.S. Incomes Drop for First Time in 22 Months

Last Updated Sep 30, 2011 9:39 AM EDT

Personal income in August fell 0.1 percent, the first drop since October 2009, as the wobbly economic recovery continues. Despite the decrease, spending rose by 0.2 percent, following a 0.7 percent gain in July and a 0.2 percent drop during June.

The headline is disheartening, but it misses a larger point: income growth in the US has been slowing for quite some time. According to the Wall Street Journal, real disposable income "averaged 4.5% annual growth in the 1960's, 3.7% in the 1970's, about 3% in the '80's and '90's and only 2.5% last decade." This year income growth is just over 1 percent, as the economy has stalled out.

A grim picture, but the historic context provides clues as to how consumers ended up with piles of debt and reduced means to pay down that debt. As income growth slowed, the housing and credit bubble of the last decade allowed many Americans to borrow to supplement their stagnating wages. (Please hold back your judgment on this statement--just trying to establish a fact pattern.) All of that consumer spending on steroids accounted for a good portion of the dot-com bust recovery. But the price was steep: in the post-Great Recession years, consumers are using whatever income they have to reduce debt and beef-up savings.

As consumers take a rational approach to their own financial lives, it creates vicious cycle: less spending is a drag on overall growth, which keeps a lid on job creation and income growth, which in turn, makes consumers cautious and focused on paying-down debt and saving. Unfortunately, as personal incomes drop, many are forced to dip into their savings. In August, the saving rate fell to 4.5 percent, the lowest level since December 2009.

The sobering data reinforces what we all know: the recovery feels almost as bad as the bust itself. Not a great way to start the fourth quarter, but at least we have post-season baseball as a much-needed diversion.

Photo by Flickr User Chris Gilson, CC 2.0

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    Jill Schlesinger, CFP®, is the Emmy-nominated, Business Analyst for CBS News. She covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." Prior to her second career at CBS, Jill spent 14 years as the co-owner and Chief Investment Officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University.