The Big Drop: Personal Income Posts Largest Monthly Drop in 20 Years

The recent "fiscal cliff" situation and resulting tax increases made their impacts felt in January, as personal income declined by the largest amount in 20 years.

According to the BEA (Bureau of Economic Analysis) of the US Department of Commerce, personal income decreased $505.5 billion (3.6%) in January, which is the largest drop since January of 1993.

Disposable income dropped $491.4 billion in January, while personal consumption expenditures increased by 0.2%.

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Now, when looking at these numbers, it's important to understand that December and January were unusual months thanks to the "fiscal cliff" standoff. Many companies and individuals made arrangements to avoid the impending tax increases that were on the horizon in 2013. For instance, a number of companies paid special dividends at the end of 2012 before dividend tax rates went up in 2013.

These arrangements caused personal income to spike at the end of 2012.

In addition, the expiration of the payroll tax cut also contributed to the decrease in personal income in January.

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According to the Department of Commerce, if you exclude these "special factors" listed above, personal income actually increased in January by $37.6 billion (0.3%).

Source: BEA.gov - Personal Income and Outlays: January 2013 (*.pdf)

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