A declining personal income measure is bad news for the economy

The number of job openings went up in April, according to Tuesday morning’s Job Openings and Labor Turnover Survey, or JOLTS, from the Labor Department. That number is the highest its been in almost two years.

The U.S. government’s official employment tally for the month of May, to be released on Friday, will reveal more about the state of the job market. But it seems safe to say, by now, that the labor market is continuing to cool, which will have ripple effects throughout the economy — one being that people’s incomes are cooling, too.

Every month, the Bureau of Economic Analysis offers up a few different ways to measure people’s income. There’s total personal income and income after taxes, but neither of those gives a clear picture of what’s going on with the labor market because they include payments from the government that are not wages.

So, the BEA offers another measure of income.

“Personal income excluding transfers, like social security payments and so forth,” said Menzie Chinn, an economics professor at the University of Wisconsin-Madison. “If you’re trying to get at the underlying state of the private sector, personal income excluding the current transfers is more useful."

Right now, that number shows that income has been falling. It peaked back in September.

Shannon Grein, a senior economist with Wells Fargo, said one thing that’s dragging it down is inflation.

“Higher prices are eroding a lot of the purchasing power of households, which is obviously a challenge,” she said.

Grein said wage growth is slowing, too, because demand for labor is weak.

“No matter how much you want to characterize it, the labor market has moderated over the past number of years,” she said. “We’re basically at stall speed in terms of hiring. The latest openings data suggested a little bit of a pickup, but openings remain lower than they’ve been.”

This decline in income could drag the rest of the economy down with it. Kate Bahn, chief economist with the Institute for Women’s Policy Research, said that’s because personal income is a leading indicator.

“When we have declining personal income, that is going to mean that particularly people with less wealth are going to have to either reduce their spending or have more debt to maintain their family consumption,” she said.

And that’s going to ripple outward.

“In a consumer driven economy, when people have less disposable income, they’re spending less, and so there’s less economic activity generated, broadly speaking,” Bahn said.

The economists at the National Bureau of Economic Research keep a close watch on personal income excluding transfers, because it can be one indicator of when a recession is starting.