State personal income: fourth quarter of 2006: annual estimates for 2006

Survey of Current Business, April, 2007 by David G. Lenze

PERSONAL income for the United States grew 1.2 percent in the fourth quarter, the same as in the third quarter, according to estimates from the Bureau of Economic Analysis (BEA) (chart 1). (1)

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For the year 2006, growth was strong. Personal income increased 6.3 percent, the highest annual growth rate since the current expansion began in December 2001. In 2005, personal income grew 5.2 percent. Notably, personal current taxes, which are deducted from personal income to obtain the amount available for spending or saving, increased 13.1 percent in 2006, more than double the growth rate of personal income.

The estimates of annual personal income discussed in this article are preliminary. They are scheduled to be revised later this year when more complete and more detailed data become available. Quarterly estimates are revised every quarter.

Personal income is the income received by all persons from all sources; it is defined as the sum of net earnings by place of residence, rental income of persons, personal dividend income, personal interest income, and personal current transfer receipts. Personal income for the Nation is the sum of personal income estimates for all states and the District of Columbia. Some of the data used to estimate personal income are compiled on a place-of-work basis, but because state personal income reflects the income of residents of a state, a residence adjustment is required.

Fourth Quarter of 2006

The 1.2-percent growth rate in the third and fourth quarters of 2006 was below the average growth rate of 1.4 percent over the last 3 years (chart 2). Growth exceeded inflation; the national price index for personal consumption expenditures fell 0.2 percent in the fourth quarter after rising 0.6 percent in the third quarter.

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Growth accelerated in 18 states and decelerated in 25 in the fourth quarter. The largest acceleration, 2.1 percentage points, was in North Dakota. The largest deceleration, 2.6 percentage points, was in the state of Washington. Growth accelerated in four of eight BEA regions--New England, Mideast, Great Lakes, and Plains--and decelerated in the others.

Earnings

Nationally, earnings by place of work--the sum of wages, wage supplements, and proprietors' income--rose 1.3 percent in the fourth quarter, compared with 0.8 percent in the third quarter. Earnings is typically the largest contributor to personal income growth. In the fourth quarter, the leading industry contributors to earnings growth were finance and insurance, professional and technical services, and state and local government.

Extraction of minerals (including oil, gas, copper, nickel, uranium, and gold) continued its strong contribution to earnings growth in the area stretching from Louisiana, Texas, Oklahoma, and New Mexico through Colorado, Wyoming, and Montana and into Alaska. The mining industry was the biggest contributor to fourth-quarter earnings growth in four of those states (table A).

In contrast, construction subtracted from earnings growth in most states, with the notable exceptions of Louisiana, which is still rebuilding property damaged and destroyed by the hurricanes and flood in 2005, and Wyoming, whose mining sector continues to support construction. Construction also contributed small amounts to earnings growth in 10 other states, such as Nevada and Texas, with the fastest personal income growth.

Dividends, interest, and rent

These items, known as property income, grew 0.9 percent in the fourth quarter of 2006, down from 2.5 percent in the third quarter.

Personal interest income, the largest component of property income, fell 1.3 percent in the fourth quarter, the first decline since the second quarter of 2004. Personal interest income turned down, reflecting a broad decline in interest rates over the quarter.

Rental income of persons and personal dividend income both rose. Rental income growth decelerated, mainly reflecting a deceleration in space rent and an acceleration in total expenses.

Transfer receipts

Transfer receipts grew 0.7 percent in the fourth quarter of 2006, down from 1.8 percent in the third quarter. Personal current transfers decelerated because of a downturn in state and local government benefits (mainly Medicaid payments).

Annual Estimates; 2006

U.S. personal income grew 6.3 percent in 2006, up from 5.2 percent in 2005 (chart 3). Inflation, as measured by the national price index for personal consumption expenditures, was 2.8 percent in 2006, down from 2.9 percent in 2005.

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The growth in 2006 was the strongest annual growth since the current expansion began in December 2001. However, the 2006 estimates reflect more-than-usual statistical uncertainty for some states, particularly Louisiana, which lost about 200,000 residents and is still feeling the effects of the hurricanes and flood in 2005. (2) The Federal Emergency Management Agency (FEMA) transferred about $700 million in assistance to residents of Louisiana in 2006.

All eight BEA regions registered solid accelerations in personal income growth. For the third consecutive year, the Southwest region enjoyed the fastest growth (8.3 percent, up from 7.7 percent), and the Great Lakes region saw the slowest growth (4.8 percent, up from 4.0 percent). The contrast between the two regions reflected a mining boom in the Southwest and employment losses in auto manufacturing in the Great Lakes.