The news recently about Indiana’s economy was a mixed bag. According to the U.S. Bureau of Economic Analysis, Indiana ranked 16th in growth of personal income among the 50 states. Our 3.7 percent increase over 2011 beat out the national figure of 3.5 percent.
Contained within these positive numbers are a few disturbing facts. The difference between the Indiana growth rates, quarter by quarter, and the U.S. rates declined over the course of 2012. The advantage (0.2 percent) we had in the first quarter turned negative (-0.5 percent) by the fourth quarter.
Relatively then, Indiana slipped compared to the nation as the year progressed. In the fourth quarter our 1.4 percent growth ranked 48th or the third-slowest in the U.S.
One reason for this slower Hoosier growth lies in the nation’s unusual fast growth in dividends, interest and rent. We depend less on this form of income than do other states. In all, 68 percent of our personal income growth came from earnings compared to 63 percent nationally.
In addition, Indiana is not noted for having large numbers of heavily compensated executives. In 2012, executive compensation ballooned at the end of the year boosting the data for both Indiana and the U.S.
Both of these factors were in anticipation of higher federal personal income tax rate. Therefore, we may expect a decline in earnings nationally in the first quarter of 2013.
Among the favorable details of these data is the slight rise in relative per capita personal income for Indiana. The state now ranks 39th in PCPI and is 14 percent below the national figure. These data represent a continuing, but slight improvement over the past five years.
The problem with PCPI, although it is used widely as a measure of collective well-being, is that does not tell the story of the average household and is limited for policy purposes.
Personal income includes earnings by workers and proprietors; it also includes, as noted above, dividends, interest and rent, or DIR, plus transfer payments.
DIR are not necessarily received by people. They are credited to states and counties based on federal income tax returns. Yet for many of us, whatever DIR we get goes into a retirement account we may not touch for decades.
Transfer payments include unemployment compensation, which means the worse the economy, the higher this component of personal income. Also included are Social Security payments, which depend on the number of people older than 65 or on disability.
Not included in personal income are withdrawals made by individuals from their savings. These may be simply bank accounts, certificates of deposit, all forms of IRAs, mutual funds, annuities, stocks and bonds. Given our demographics, this omission becomes more important annually. Fortunately, the BEA is working on the problem.
These shortcomings do not invalidate the data. They do suggest that Indiana’s political leadership a few years back made a mistake in hitching its wagon to PCPI as an indicator of its success.
We can hope the current administration will not make the same mistake.