US personal income falls. Blame the government.

June is providing an early example of what happens when government stimulus ends.

In May, more than 50 million recipients of Social Security (and Supplemental Security Income) each got a one-time $250 payment as part of the federal government's stimulus plan. So, not surprisingly, Americans' personal income rose at an annualized rate of 1.3 percent that month.

In June, their personal income fell, the Commerce Department reported Tuesday. Care to guess the size of the decline? 1.3 percent.

That's the challenge of stimulus programs – whether they come in the form of direct payments, onetime tax cuts, or cash-for-clunkers programs. They're like feeding sugar to an economy. The boost is fast but temporary.

The federal stimulus so far has helped stabilize the economy from the panic that was evident early this year. But eventually, artificial stimulus has to give way to real economic activity for a recovery to happen.

Until then, the income picture will stay dismal. Stripping out inflation and the transfer payments Americans' receive in the form income of Social Security and other mostly government benefits, personal income has fallen in each of the past six months and in 16 of the past 20 months, according to Tuesday's Commerce Department report. It's now 7.1 percent below the peak reached in September 2007, despite a 1.6 percent rise in the population.

"This [private-sector income decline] bodes poorly for any forceful rebound in personal consumption spending over the months ahead, at least once we are clear of the distortions introduced by the cash-for-clunkers program, which will provide a transitory boost," writes Richard Moody, chief economist with Forward Capital in Austin, Texas. "The government giveth, the government taketh away."
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