Growth Without More Jobs and Rising Incomes
March 30, 2010
The Federal Reserve on March 15 reported that industrial production increased 0.1 percent in February. Before the politicians start celebrating, they should realize that credit goes to the winter weather—which boosted mining and utility production by increasing energy demand—not to their “stimulus.” Indeed, while overall industrial production rose slightly in February, manufacturing fell by 0.2 percent. Meaning, the recovery’s strength remains unimpressive. Consider personal income. According to the Commerce Department, personal income declined in 42 states last year. It rose in just six states and the District of Columbia, where government payments were the driving force.
The statistical appendix to the 2010 Report of the President’s Council of Economic Advisers provides additional insight. In 2008, personal income—which includes wages, salaries, rents, interest, dividends and proprietors’ income, plus government transfer payments—was an estimated $12.2 trillion.
This income is what is available to individuals to purchase consumer goods, pay taxes and save. Personal income is superior to gross domestic product (GDP) as a measure that tells us something about changes in people’s economic well-being as the economy ebbs and flows.
In the fourth quarter of 2007, which the National Bureau of Economic Research has identified as the peak of the previous business expansion, personal income was running at an annual rate of $12.1 trillion.
Personal income reached its peak several months later, in the second quarter of 2008, when it was just under $12.3 trillion at an annualized rate. After three quarters of decline, it reached a trough in the first quarter of 2009 at $11.95 trillion, a 2.8 percent decline. It then rose during the final three quarters of last year, returning to 99.3 percent of its previous quarterly peak—within hailing distance of what some might consider a complete recovery.
But a closer examination of the data tells a less compelling story.
For example, private wages and salaries peaked in the third quarter of 2008 at $5.4 trillion and then fell during the next three quarters to $5.1 trillion. Since then, this component of personal income has regained only a small fraction of its previous loss, ending 2009 at an annual rate of $5.2 trillion: 4.4 percent below the previous quarterly peak.
Without a turnaround in private employment, there seems little prospect for a return to the previous high rate of private wage and salary payments.
Several smaller components of personal income also remain substantially below their fourth-quarter 2007 levels. Proprietors’ income—that is, income of unincorporated businesses—was still down by 3.3 percent in the fourth quarter of 2009, and interest-and-dividend income was down by almost 14 percent.
Personal rental income was the exception to the pattern, rising steadily after the first quarter of 2007 and ending up 137 percent higher in the fourth quarter of 2009. This oddity probably reflects the turmoil in the housing market, with many people shifting from owner-occupied housing to rental housing. Although this may be good news for some landlords, it is not a good sign for the overall economy.
Another troubling sign is the increased flow of government transfer payments to individuals. In the fourth quarter of 2007, such transfer payments were running at an annual rate of $1.7 trillion; by the fourth quarter of 2009, they had exceeded $2.1 trillion, a 24 percent increase in just two years.
In 2007, total government transfers to individuals amounted to 14.2 percent of personal income; late in 2009, they constituted 17.5 percent. This rapidly growing dependence on the dole does not suggest a healthy recovery. Indeed, it heralds the exacerbation of what already was a serious problem for the U.S. political economy.
The personal income data show that the recovery has been weaker and less sustainable than many observers have taken it to be. Not all sources of personal income are created equal, and in the present circumstances, not even the rise in personal rental income provides grounds for optimism.
So far, the recovery has been not only “jobless,” but hollow—like a piñata with no candy inside.
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