Personal income rose 2.6% in December, following a 1.0% gain in November according to the Commerce Department today. It was the largest one month gain since a 3.3% climb in December 2004 and the biggest two month jump since November and December 1993 combined for at 3.9% boost. Economists had predicted a 0.8% increase for December.
The explanation for the tremendous jump in income is simple and from the Commerce Department income source figures. Of the $353 billion in new income, 76% or $268 billion came from dividends. Companies choose to pay the next year’s dividends early or to increase they payout because the lower Bush tax rates on dividends expired at the end of the year with the Congressional budget agreement in January.
In the past thirty years personal income has surged in the last two months of the year three times, 3.5% in November and December 2004, 3.9% in the last two months of 1993 and 3.7% at the end of 1992. In each case income then plummeted in the first month of the New Year, -2.3% in 2004, -2.8% in 1993 and --3.7% in 1992.
In effect the December income gain is an accounting mirage. It did not stem from the share of increased economic activity and company profits being paid to workers and shareholders. Without the artificial timing of dividend payments personal income growth would probably have been near 0.5% for the month. The tax code changes simply pulled income forward into 2012. As an indicator for stronger and economic growth in the first and second quarters December's personal income data is an illusion.
Chief Market Strategist