High Inflation Leads to Negative Income Growth

David Sorenson - November 21, 2022
High Inflation Leads to Negative Income Growth

South Dakota real (inflation-adjusted) personal income is trending downward in 2022 after growing each year between 2017 and 2021.  While the state experienced growth in the first quarter of 2022, the inability to keep up with inflation led to a greater decline in the second quarter.  Mixed quarterly gains and losses have been typical since the beginning of the COVID pandemic, while quarters with personal income losses were less common in the previous three years.  When accumulated over entire years, South Dakota experienced healthy income growth rates of 8.5 and 2.8% in 2020 and 2021, respectively, which followed the low-growth 2017, moderate-growth 2018, and higher-growth 2019.  The 2022 South Dakota experience has been markedly better than the nation’s declines of over 4.5% (annualized) in each first two quarters of the year.  The US had experienced annual growth between 2017 and 2021, although with less variation than South Dakota’s growth.

South Dakota’s faster growth has led to the state approaching and often surpassing the nation in per capita personal income, a relationship last seen in annual data in 2015.  The US per capita income exceeded South Dakota’s each quarter from the beginning of 2017 to the beginning of the pandemic, with the annualized gap ranging from about $500 to $2,700.  South Dakota’s per capita income exceeded the national figure in the first quarter of 2020 and has maintained its lead in five of the following eight quarters.  The South Dakota lead reached more than $2,000 higher in the fourth quarter of 2020, most likely reflecting the greater state economic activity in the early months of the pandemic.  Looking further back into data since 2000 reveals that the flip from a higher US per capita income than South Dakota per capita income also occurred between 2008, another year of great economic turmoil, and 2015.

Income Summary and Forecast

High Inflation Leads to Negative Income Growth | Dakota Institute - Income Summary & Forecast
Source: Dakota Institute, Wells Fargo Economics, BEA

South Dakota has achieved the higher per capita income while having population growth roughly double that of the nation as a whole.  However, a significant amount of the per capita income differential can be attributed to significantly higher labor force participation (68.7% in SD versus 63.2% US) and employment-to-population (67.1% in SD versus 60.1% US) rates.  South Dakota ranks in the top four  states, with North Dakota, Colorado, and Nebraska, in both measures.

Much of the personal income growth in both 2020 and 2021 is related to transfer payments, especially the stimulus payments in the second quarter of 2020 and first quarter of 2021.  Transfer payments increased by between fifty and seventy-five percent in both South Dakota and the nation in each of those quarters when compared to the prior quarter.   Prior to the pandemic, both the state and nation had fairly stable low growth rates in transfer payments.  The growth rates have become more stable again, but now at negative values reflecting the inability to keep up with inflation, some of which has been attributed to the stimulus payments, especially the 2021 stimulus.

South Dakota and US Personal Income Growth

High Inflation Leads to Negative Income Growth | Dakota Institute - South Dakota & US Personal Income Growth
Source: Dakota Institute, BEA
Note: Growth rates are annualized percent changes in real quarterly income as reported by BEA. Earnings from work include wage
and salary income plus contributions to insurance and retirement programs. Transfer payments include government payments to
individuals through programs such as social security, medicare, and unemployment insurance. Proprietor’s income is not displayed
in the bottom panel of the figure but is included in the upper panel.

Earnings, a much larger component of personal income, have also varied significantly between the state and nation and over time.  The volatile South Dakota farming sector fluctuated between small declines and sizable increases since 2016, with significant increases continuing into the first half of 2022.  The U.S. farming  sector also exhibited the same large increases in 2022, although earnings had not increased as much as in South Dakota prior to 2022.  Nonfarm earnings increased in each year from 2017 to 2021, with the highest growth rate in 2019, prior to declining in both the first and second quarters of 2022.  Earnings in current dollars increased slightly in the first quarter but not enough to keep up with inflation, while the inflation effect compounded a loss in current dollar terms in the second quarter.  The South Dakota losses were similar to national trends.

Looking ahead to the remainder of 2022 and 2023, a simple forecasting model using prior-period growth and national GDP forecasts from the Federal Reserve Bank of Philadelphia’s Survey of Forecasters predicts that South Dakota personal income will drop by 3.3% over 2022 before rebounding to 2.1% growth in 2023.  The forecasts exceed national projections of a decline of more than five percent in 2022 and about one percent growth in 2023.  Assuming continued population growth of just under one percent per year, per capita personal income is forecast to fall by about four percent in 2022 and grow by 1.3 percent in 2023.  After the sharp rise in 2020 in real per capita income and a smaller rise in 2021, real per capita income had reached over $69,000 (in May 2022 dollars).  Given current forecasts, it will fall about $3,000 in 2022 and remain under $67,500 in 2023.