Personal federal grants

PERSONAL income growth for the Nation slowed to 0.8 percent in the third quarter of 2004 from a revised 1.6 percent in the second quarter. (1) The slowdown was evident across all eight BEA regions, as each region grew at a slower rate than in the second quarter. The growth in all regions, however, was fairly consistent, differing from national growth by about 0.2 percentage point or less. In contrast, in the second quarter, the Rocky Mountain region grew at nearly twice the pace of the Mideast region (chart 1).

Personal income growth in the third quarter features the following:

* Growth in all but seven states slowed, but much of the slowdown disappears when inflation is accounted for.

* Growth was highly concentrated in a few industries--two industries contributed about a third of the growth in earnings, and five industries contributed another third.

* Hurricane property damage reduced Florida's personal income growth rate 0.6 percentage point to 0.5 percent and Alabama's growth rate 0.2 percentage point to 0.6 percent (see the appendix for details).

Personal income growth in all regions slowed; the slowdowns ranged from 1.0 percentage point in the Far West region to 0.1 percentage point in the Mideast region. Personal income growth in all but seven states slowed. In Kansas, personal income increased at the same rate as in the second quarter, and in Alaska, Connecticut, Louisiana, Maryland, New Jersey, and New York, personal income growth accelerated slightly.

In the third quarter, Hurricanes Charley, Frances, Ivan, and Jeanne took their toll on personal income growth in Florida and in Alabama (for details, see the appendix). In 10 other states, the storm-related damage had little effect on total personal income growth, but it did affect some of the components of personal income, such as dividends, interest, and rent, proprietors' income, and personal current transfer receipts.

Estimates of personal income by major source and of earnings by industry are available on BEA's Web site at <www.bea.gov>.

Personal income growth by component

Net earnings. This component, which typically accounts for 69 percent of personal income, grew 1.1 percent in the third quarter after increasing 1.7 percent in the second quarter. However, this slowdown almost disappears when inflation is accounted for; real net earnings increased only 0.8 percent in the third quarter after increasing 0.9 percent in the second quarter. (2)

By state, earnings in South Dakota were the weakest, decreasing 0.8 percent (table A). In South Dakota and in several other states with large farm sectors (such as Arkansas, Iowa, Nebraska, and North Dakota), large decreases in cash receipts from livestock sales overwhelmed moderate increases in wages and proprietors' income in the nonfarm sector. As a result, these states have some of the slowest personal income growth rates in the third quarter (chart 2). In contrast, Utah had the fastest growth in earnings, at 2.3 percent; earnings in all industries except forestry and other services grew faster than the national average (table B). (3)

Two industries--health care and professional services--contributed slightly more than a third to the growth in total earnings by place of work in the third quarter. Their strength was generally spread across all regions. Five other industries--construction, durable-goods manufacturing, transportation, real estate, and administrative services--contributed another third to the growth of total earnings. These industries, however, displayed substantial regional variation.

Dividends, interest, and rent. This component decreased 0.3 percent nationally despite increasing in seven of the eight BEA regions. The increases in these regions were offset by a 3.0-percent decrease in the Southeast region that was mainly due to uninsured damages to owner-occupied housing as a result of the hurricanes.

Transfer receipts. This component increased 1.0 percent nationally despite little change in seven regions. The increase for the Nation was mainly due to a 3.8-percent increase in the Southeast region that was mostly attributable to insurance claims for property damage as a result of the hurricanes.

Appendix: The Effects of the Hurricanes on State Personal Income for the Third Quarter

The estimates of personal income for the third quarter of 2004 reflect the effects of Hurricanes Charley, Frances, Ivan, and Jeanne. These storms caused extensive damage, particularly in Florida and Alabama; as a result, several components of state personal income were affected. Rental income of persons--a component of dividends, interest, and rent--was reduced $13.6 billion, and proprietors' income was reduced $3.9 billion; both reductions reflected the uninsured losses of property owned by household enterprises. (4) Business payments to persons, a component of personal current transfer receipts, was boosted $13.7 billion, reflecting net insurance settlements for damage to consumer durable goods. Other effects of the hurricanes are embedded in BEA's source data and cannot be identified, so BEA did not attempt to quantify them.

A disaster has two effects on personal income. It increases both the consumption of fixed capital and business transfer payments. As discussed below, damage to the property of household enterprises affects proprietors' income and rental income. They are reduced by the amount of uninsured losses measured by consumption of fixed capital less business transfer payments. Damage to consumer durable goods affects only personal current transfer receipts. It is raised by the amount of the insured losses for these goods.

In the personal income account, the consumption of fixed capital is an expense that is subtracted in the calculation of proprietors' income and rental income of persons. The damage or destruction of fixed capital (residential and nonresidential) by disasters, such as hurricanes, is recorded as an increase in the consumption of fixed capital. (5) The damage or destruction of consumer durable goods (such as cars, boats, and household appliances) does not affect the consumption of fixed capital, because the purchases of these goods are treated as consumption not investment.

Property insurance is also an expense that is subtracted in the calculation of proprietors' income and the rental income of persons. The recent comprehensive revision of the national income and product accounts introduced a distinction between the level of losses that normally occur and the extraordinary losses that occur during major disasters. (6) Normal, or expected, losses are deducted from the premiums that policyholders pay for insurance. (7) Extraordinary losses (claims) are recorded as business transfer payments from the insurance industry to persons or to other industries.

National estimates of the effects of the four hurricanes on proprietors' income, rental income of persons, and current personal transfer receipts were distributed to states on the basis of reports of insured losses by state from private sources and on the basis of grants for disaster housing assistance by state from the Federal Emergency Management Agency.

As a result of the damage caused by the hurricanes, personal income growth in Florida was reduced 0.6 percentage point, growth in Alabama was reduced 0.2 percentage point, and growth in West Virginia was reduced 0.1 percentage point (table C). Most of the damages that were sustained by proprietorships and partnerships were to tenant-occupied housing and were recorded ill the real estate industry. Utilities, nondurable-goods manufacturing, retail trade, health care, and accommodation services were also affected. (8) Damages to owner-occupied housing were recorded in rental income of persons.

Upcoming Release of County Estimates of Compensation by Industry

On January 27, BEA will release, for the first time, county estimates of compensation by industry. Compensation--the sum of wage and salary disbursements and supplements to wages and salaries--is now a key statistic in the personal income account as a result of improvements that were part of the comprehensive revisions of the national income and product accounts and of local area personal income.

The county estimates by industry for 2003 are being accelerated and will be available 13 months after the end of the year, an acceleration by 4 months. This acceleration of the release of a key component of local area personal income meets BEA's Strategic Plan goal of improving the timeliness of county-level personal income and its components. The compensation by industry estimates for 1998-2003 will be presented in a new table--CA06 Compensation of Employees by Industry.

The estimates can be accessed interactively at <www.bea.gov/bea/regional/reis>. In addition to the county estimates, BEA also will release compensation by industry for metropolitan areas, micropolitan areas, and BEA economic areas.