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The New Economy

US personal income gets timely help from stimulus

By / June 26, 2009



The US government's stimulus is pushing money into Americans' pocketbooks with gusto.

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Just as total wages and salaries in May swooned to their lowest level in nearly two years, Americans got a timely boost from Uncle Sam: a record $2.24 trillion in government benefits (calculated at an annual rate), the Commerce Department reported Friday. Those government transfers, plus the temporary decrease in federal taxes, made disposable income soar 1.6 percent over the previous month. That was the highest monthly increase in a year.

With the extra money, consumers spent an extra 0.3 percent in May, the first monthly rise since February. Amercans' savings rate rocketed to 6.9 percent, the highest level since 1993.

But without that government help, the picture looks far less robust. Americans' disposable income rose only 0.2 percent in May – less than the 0.9 percent advance in April (when government stimulus is factored out).

Much of the rise in May's government spending was temporary, anyway. Since most of the increase in May came from onetime $250 checks to Social Security recipients, the impact of the stimulus will fade going forward.

"As night follows day, incomes will decline in June as the onetime payments drop out, and the saving rate will drop back as well," wrote Nigel Gault, chief US economist for IHS Global Insight, in an analysis.

Whether that's good or not depends on the timing of the recovery. If it's imminent, then a pickup in private-sector salaries will make up for the drop in government spending. If the recovery is delayed, then the next few months will be difficult for the consumer and those businesses that rely on them.

The historical record isn't reassuring on this point. The last time government payments jumped so fast in a single month was last May, when the Bush administration was sending out stimulus checks to blunt the current recession. It didn't work.

The last time government payments jumped so quickly over a three-month period, Jimmy Carter was trying to counter the 1980 recession with a package of extended unemployment benefits and retraining and other initiatives. That six-month slump ended, but it was followed a year later by a far more severe 16-month recession, which was the longest postwar contraction in US history.

Until now.

Timing is everything. Will President Obama get it right?
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