State Personal Income: First Quarter of 2007

PERSONAL income in the United States grew 2.2 percent in the first quarter of 2007, up from 1.4percent growth in the fourth quarter of 2006 (chart 1).1

Personal income in only five states (New York, Connecticut, New Jersey, Illinois, and Delaware) grew faster than the national average. Another

four states matched the national growth rate. The rest of the states and the District of Columbia grew slower than the national growth rate (chart 2). The geographical concentration of personal income growth in the five fastest growing states can be attributed to unusually strong first-quarter earnings growth in the finance industry, which is centered in New York. Personal income growth in New York, Connecticut, New Jersey, Illinois, and Delaware accounted for 29 percent of the Nation's growth. In Connecticut and New Jersey, growth rates reflected commuting flows with New York; personal income represents the income of a state's residents regardless of where it is earned.

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, dividend income, interest income, and current transfer receipts. Personal income for the Nation includes the District of Columbia. Because state personal income reflects the income of residents, a residence adjustment is also included.

Finance industry strength

Earnings in the finance industry grew 10.5 percent in the first quarter after growing 2.3 percent in the fourth quarter. In contrast, earnings in all industries grew 1.9 percent after growing 1.7 percent. In addition, the finance industry accounted for 28 percent of the Nation's personal income growth, compared with 9 percent in the fourth quarter of 2006.

The national estimate of first-quarter earnings includes an adjustment of $50 billion (at an annual rate) to account mainly for unusually large bonus payments in the securities industry. These types of irregular payments are not accounted for in the primary source data for the preliminary estimates of wages and salaries. The adjustment to first-quarter wages was based on data from state governments and other sources. It was allocated to states in proportion to first-quarter 2006 wages from the Quarterly Census of Employment and Wages for the securities industry (table A, page 142).

Reflecting in part the adjustment, wage and salary disbursements in New York's finance industry grew 26 percent in the first quarter (chart 3). Growth rates of this magnitude, though rare, are not unprecedented. Wages in New York's finance industry also grew 26 percent in the first quarter of 2000 at the height of the bull market in stocks fueled by the technology industry boom.2

Two statistics indicate the importance of the securities industry to New York: (1) Almost 40 percent of the Nation's securities industry is located in New York as measured by wage and salary disbursements in 2005, and (2) the securities industry accounted for 12 percent of New York's wage and salary disbursements in 2005. Although California also has a large share of the Nation's securities industry (11 percent), the industry generated only 2 percent of California's wages, the same proportion of total wages as for the Nation. In fact, besides New York, only in Connecticut, Massachusetts, New Jersey, and Illinois is the securities industry's share of total wages significantly greater than it is nationally; that is, the location quotient for these states is much greater than one. The location quotient for the securities industry in New York was 4.87. The quotient was 2.83 in Connecticut, 1.99 in Massachusetts, 1.47 in New Jersey, and 1.22 in Illinois.

As noted, all of these states except Massachusetts grew faster than the Nation in the first quarter, while Massachusetts matched the national growth rate. Wage and salary disbursements in the securities industry in Massachusetts were strong in the first quarter; it contributed 0.63 percentage points to personal income growth (table 3). But because of large fourth-quarter lump-sum wage payments in the finance, real estate, and arts industries, first-quarter personal income growth was less than it otherwise would have been.

Residence adjustments

Commuting to work across state borders is most common in the New England and Mideast regions. The net residence adjustment for such commuting is at least 10 percent of net earnings in Delaware, Maryland, New Hampshire, and New Jersey.3 Even so, this is a stable component of income and does not often have a large effect on state quarterly growth rates. For example, the residence adjustment contributed only 0.09 percentage points to Connecticut's personal income growth in the fourth quarter of 2006 and 0.23 percentage points to New Jersey's growth. It subtracted 0.15 percentage points from New York's growth. In the first quarter of 2007, however, the residence adjustment added 0.31 percentage points to personal income growth for Connecticut and 0.68 percentage points for New Jersey (table 2). It subtracted 0.46 percentage points from New York's growth rate, about three times as much as in the previous quarter.

If it were not for the residence adjustment, personal income would have fallen in New Hampshire in the first quarter. The entire 0.3-percent increase in personal income in the first quarter can be accounted for by the residence adjustment, primarily for commuting to work in Massachusetts. Although New Hampshire has been one of the slower growing states in recent years, the first-quarter weakness was in part a consequence of its very strong fourth-quarter growth, which was more than twice as fast as national growth. An unusually strong growth spurt in one quarter is frequently followed by weakness in the next quarter that brings a state back to its long-term growth trajectory.

Other industries

Earnings in mining and information grew faster than the all-industry average of 2.1 percent. Earnings growth in professional services matched that rate, while the other 20 industries grew slower. Farming was the weakest, declining 7.4 percent.

Although still strong, earnings in the mining industry slowed notably in the first quarter, growing 2.8 percent after growing 5.4 percent. This industry has been one of the primary drivers of growth in the Rocky Mountain and Southwest regions, two of the fastest growing regions in 2006. In Wyoming, the first quarter's 1.8 percent growth of mining earnings was its slowest since the second quarter of 2005.

Earnings in the information industry grew 3.5 percent in the first quarter after falling 2.9 percent in the fourth quarter. Its contribution to personal income growth was greatest in the District of Columbia, Colorado, New York, and California (table 3).

First-quarter wages included a Federal pay raise of 2.2 percent for both civilian and military employees. However, earnings grew only 1.7 to 1.8 percent in the quarter because of declining employment.

U.S. farm income fell 7.4 percent in the first quarter. Despite the magnitude of the decline, for most states, this had little noticeable effect on total personal income growth. For many of the slowest growing states, however, falling farm income was a major source of weakness. In North Dakota and South Dakota, the two states with the slowest first-quarter personal income growth, declining farm income subtracted nearly 2 percentage points from personal income growth. Lower government subsidies in North Dakota and crop cash receipts in South Dakota account for most of the decline. In contrast, the nonfarm sectors in these states grew only slightly less than the national growth rate.

Other components of personal income

Property income. Nationally, income from dividends, interest, and rent increased 2.3 percent in the first quarter of 2007 after increasing 0.7 percent in the fourth quarter of 2006. The acceleration primarily reflects stable interest rates after long-term yields declined in the fourth quarter.

Transfer receipts. Transfer receipts increased 3.4 percent after increasing 0.7 percent. First-quarter transfer receipts were boosted by annual cost-of-living adjustments to programs such as social security.

FOOTNOTE

1. Quarterly estimates are expressed at seasonally adjusted annual rates, unless otherwise specified. Quarter-to-quarter percent changes are calculated from unrounded data and are not annualized.

2. As is clear in chart 3, there is a break in the time series data for the finance industry between the fourth quarter of 2000 and the first quarter of 2001 when the North American Industry Classification System (NAICS) replaced the Standard Industrial Classification (SIC) system. However, in both periods, growth rates above 20 percent were caused by wage surges in the securities industry, which is largely the same in both classification systems. All of SIC industry 62 (security, commodity brokers, and services) was moved to NAICS industry 523 (securities, commodity contracts, and other financial investments and related activities). NAICS industry 523 also includes a few other industries from the SIC finance, insurance, real estate division (that is, miscellaneous parts of industries 60, 61, 62, 63, and 67).

3. Because the personal income of a state represents the income that is received by, or on behalf of, all the persons who live in that state, and because the estimates of some components of personal income (wage and salary disbursements, supplements to wages and salaries, and contributions for government social insurance) are made on a place-of-work basis, state personal income includes an adjustment for residence. A state's residence adjustment is the compensation net of contributions for government social insurance received by residents from out-of-state jobs less the net compensation received by nonresidents from in-state jobs. A negative residence adjustment for a state indicates that, in the aggregate, nonresident commuters receive more net compensation than resident commuters.