Technical Note on Quarterly State Personal Income for the Fourth Quarter of 2012

March 27, 2013 - This technical note provides background information about the source data and estimating methods used to produce the estimates presented in the Quarterly State Personal Income news release. The complete set of estimates for the fourth quarter is available on BEA's website at www.bea.gov; a brief summary of "highlights" is also posted on the website. In a few weeks, the estimates will be posted in BEA's monthly journal, the Survey of Current Business, along with more detailed analysis of the estimates ("Regional Quarterly Report").

State Personal Income

State personal income increased 1.9 percent in the fourth quarter of 2012, following an increase of 0.6 percent in the third quarter of 2012. Each of the three major income components of personal income; net earnings¹, property income (personal dividend income, personal interest income, and rental income of persons), and personal current transfer receipts contributed to the increase.

Source Data for the Preliminary Estimates

As is normally the case, the preliminary estimates of state personal income for the fourth quarter of 2012 are based on incomplete source data and are therefore subject to revision.²

The preliminary estimates of state personal income for the fourth quarter of 2012 were affected by three unusual events: the ongoing Midwest drought; Hurricane Sandy which made landfall on October 29, 2012; and accelerated dividends and bonuses due to anticipated changes to federal tax laws.

The Effects of the Midwest Drought

This past summer's severe heat and drought adversely affected agricultural production; however, indemnity payments from crop insurance partially offset the impact of lost production and buffered the effect on farm proprietors' income.

Nationwide, the reduction in farm production caused by the drought reduced farm inventories by an estimated $12 billion (annual rate) in the second quarter, $28 billion in the third quarter and $25 billion in the fourth quarter.³ Estimates indicate that crop insurance indemnity payments offset about $6 billion of the crop losses related to the drought in the second quarter; and about $15 billion in losses in both the third and fourth quarters.

To estimate both the crop losses and indemnities for affected states, BEA used bi-weekly data on crop indemnities by county from the USDA Risk Management Agency (USDA-RMA). Since, the USDA-RMA data is recorded when payments are made to farmers, it was shifted back a quarter to approximate when losses occurred.⁴ The states most affected were Illinois, Indiana, Iowa, Kansas, Kentucky, Missouri, Nebraska, South Dakota, and Texas.

More precise estimates of crop production, including changes in farm inventories, by state will become available later this year when USDA releases its annual State Income and Wealth Statistics. These statistics are incorporated into the state personal income statistics in the September release during the annual revision of state personal income.

The Effects of Hurricane Sandy

On October 29, Hurricane Sandy made landfall on the New Jersey coast and caused major damage and disruption throughout the region. Like many other disasters, Hurricane Sandy disrupted many types of production through closures of factories, offices, and transportation facilities, while causing certain types of production, such as emergency services and rebuilding activities, to increase. These effects are not included in the source data that BEA used to prepare the preliminary estimates of fourth quarter 2012 state personal income. The effects will be included, but not separately identified in the source data (BLS - Quarterly Census of Employment and Wages (QCEW)), that BEA will use to prepare the revised estimates of quarterly and annual state personal income for 2012. Some of the effects of Hurricane Sandy, such as the destruction of fixed assets, including residential and non-residential structures, as well as the insurance proceeds to compensate for these losses, are recorded elsewhere in the National Income and Product Accounts (NIPAs) but do not impact estimates of state personal income. ⁵

In the absence of QCEW data, BEA made an adjustment to the preliminary estimates of wages and salaries in New Jersey and New York to reflect the disruptions caused by Hurricane Sandy. The estimates of wages and salaries in New Jersey were reduced by about $1.6 billion (annual rates) or 0.7 percent in the fourth quarter due to the effects of the storm. The estimates of wages and salaries in New York were reduced by about $4.5 billion (annual rates) or 0.8 percent. The disruption adjustments were based on U.S. Census Bureau information on the number of private sector workers in federally designated disaster areas in both states and average daily wage rates from the QCEW.

The Effects of Accelerated Dividends and Bonuses

Personal dividend income increased 16.4 percent for the nation, or $121.2 billion (annual rate) in the fourth quarter of 2012. Based on reports from more than 2,000 companies from Compustat, BEA estimates that companies paid special or accelerated dividends of $39.5 billion in the fourth quarter, of which $26.4 billion ($105.6 billion at an annual rate) went to persons and is included in personal income. BEA distributed the accelerated dividend roughly proportionally across all states using standard procedures.

In addition to the acceleration of dividends, there is evidence that some businesses also accelerated payments of bonuses or other types of irregular pay in the fourth quarter. BEA estimates that the acceleration of bonuses and irregular pay boosted fourth quarter wages and salaries by $15.0 billion (annual rate). In June, BEA will incorporate fourth-quarter source data from the BLS quarterly census of employment and wages (QCEW) that will include these accelerated payments. Wage and salary disbursements increased 1.0 percent for the nation, or about $70.7 billion (annual rate) in the fourth quarter of 2012. The additional $15.0 billion in accelerated wages and salaries was added to the finance industry, and impacted all states, though New York ($9.5 billion), New Jersey ($1 billion), and Connecticut ($1 billion) were affected most, due to the importance of the finance industry in these states.

Footnotes

¹Net earnings is the sum of wages and salaries, supplements to wages and salaries (employer contributions for government social insurance, and employer contributions for employee pension and insurance funds), proprietors' income with capital consumption adjustment (CCADJ) and inventory valuation adjustment (IVA), less contributions for government social insurance, plus an adjustment for residence.

²The quarterly state estimates of personal income are controlled to the national (NIPA) estimates (less adjustments) that were published February 28, 2013 that are also subject to revision.

³For additional information about the methodology used to estimate the impacts of the drought, see the box "Effects of the 2012 Midwest Drought on the NIPA estimates" in the October 2012 Survey of Current Business.

⁴In quarterly state personal income, crop insurance indemnities are included on an accrual basis in the quarters in which the losses occur, not when the indemnities are received.

⁵For a discussion of the impact of disasters on the National Income and Product Accounts (NIPAs) please see "Key Issues of Affecting the NIPAs for the Fourth Quarter of 2012" in the February 2013 Survey of Current Business.