Monday, November 01, 2010
More On Personal Incomes
As I mentioned in Friday's post on GDP, GDP growth in the third quarter was extremely dependent on consumption spending, but the weakness in personal income growth implies that growth will decline.
I also pointed out that the third quarter got a boost from the last extension of unemployment benefits. This boost is due to rapidly slide out of the economy.
Today BEA released September's personal income and outlays report. I have been extremely curious about this one, because here is where the effect of state and local layoffs are going to begin to register. The next few months are going to be governed by prices (already rising for necessities, but collapsing for mass market non-necessities), the state and local layoff effect, and the slow drop off of persons receiving unemployment benefits. It is not going to be assisted by the fact that Social Security recipients get no COLA. The majority of them are going to see their real incomes drop, because many older people concentrate their spending on needs categories, and needs categories are generally rising a bit.
Although the private sector is slowly generating jobs, it is not doing so quickly enough to generate any kind of employment for the majority of the millions who are going to lose benefits. That is going to cause a downward "bump" in the economy. I spent a few more days roaming retail, and you can see the prices ratcheting down in the quick feedback categories. Personal income in October ex-needs is still dropping.
Back to the BEA release:
Personal income in current dollars (i.e. not adjusted for prices):As my niece would say, "Uh-oh".
Personal disposable income (after tax) in chained dollars (adjusted for price changes):
- June: +0.0
- July: +0.2
- Aug: +0.4
- Sept: -0.1
- June: +0.2
- July: -0.2
- Aug: +0.2
- Sept: -0.3
What exactly the Fed thinks it can change about this by dumping money into the marketplace which will only be used to buy up commodities is beyond me. They'll cause deflation rather than prevent it.
To explain why, we go back to the moving parts of income:
Private wage and salary disbursements increased $3.3 billion in September, compared with an increase of $23.6 billion in August. Goods-producing industries' payrolls decreased $1.6 billion, in contrast to an increase of $6.7 billion; manufacturing payrolls decreased $1.0 billion, in contrast to an increase of $2.3 billion. Services-producing industries' payrolls increased $5.0 billion, compared with an increase of $16.8 billion. Government wage and salary disbursements decreased $4.8 billion, compared with a decrease of $8.2 billion.This gives us the means to decompose the rather large swing.
Personal current transfer receipts decreased $21.5 billion in September, in contrast to an increase of $35.1 billion in August. The September change reflected the effects of unemployment compensation legislation, which reduced emergency unemployment insurance benefits by $25.5 billion at an annual rate in September, after boosting benefits by $20.5 billion in August.
Contributions for government social insurance -- a subtraction in calculating personal income -- decreased $0.1 billion in September, in contrast to an increase of $3.0 billion in August.
1) The private sector is still growing, although it is growing slowly.
2) The government sector contracted. A great deal of this was education layoffs.
3) Monies the government gives to individuals to spend swung negatively around 50 billion annualized between the two months, and the majority of that derived from the sudden surge in unemployment and now the slow draining losses.
4) The net employment effect was negative, because FICA receipts fell and both government and private employees pay them. But it was only slightly negative.
Going forward, we should see slightly larger month-to-month gains in private employment, some slow continuing drop in government employment, and a continuing fall in unemployment benefits. The fall in unemployment benefits will be minimally offset by more people going on Social Security, but it will probably take several years for enough retirees to qualify to full offset the loss. Government raises will kick in substantially in January to give us a few months of net increases. But still state and locals have to pare, and I see no end in sight for that.
If you want graphs, there are some pretty nice ones at Bloomberg's Econoday report on this release.
But now we also have to account for current tax policy. Under current law, taxes are going to increase substantially in January for virtually everyone. A lot of families with children and median-level incomes could see their annual tax bill increase over 1K. Some over 2K.
This has a lot of economists screaming, drinking, and curling up in fetal balls. It's not clear that we can avoid a new contraction even if the Fed backs off and Congress manages to get itself in gear and pass tax legislation preventing at least the huge majority of the tax increase by the middle of November.
If we go into a second contraction, matters could get brutal. Even if we get action on tax cuts, the Fed action could push us into recession. Our best hope is probably for just a few negative months.
If the Fed backs off and Congress gets itself in gear, we could avoid one but we might not avoid a second contraction.
If both the Fed and Congress act sanely and we just hit a negative two months or so, by the second half of next year we could roll back to somewhat above trend, in the mid twos.
The drawdown from the unemployment expiration is pretty significant, and it is hitting the economy right now. Last week's claims release showed 4.6 million people receiving extended or EUC benefits. We began July at about 3.9 million. We peaked in August at over 5.8 million. A lot of people got lump-sum payments, which accounts for some of the spending. If you figure the average weekly benefit net taxes at $280 X 4.2, that's 2 million people losing about $1,176 dollars in income a month or a total 2.35 billion a month so far. By the end, we'd expect the net effect (some will take jobs) to be about 7 billion negative a month.
Many working people are still seeing their actual paychecks drop due to benefit increases, or most of their nominal raises eaten up by benefit increases. It's really government retirees and government employees who are seeing most of the increases, plus rehires. Well, rehires are occurring, but not fast enough to completely offset this swing.
Another way to look at it was that in Q3, personal real disposable income only increased an annualized 13.5 billion dollars, and the expected effect next quarter of just the loss of unemployment benefits is going to be a minimum of around 11 billion annualized. So we'd better hope the retail hiring intentions surveys hold!
years and were able to fund the Federal government.
Yes, it will cause upheaval, but my guess is that multinationals will bring production here or bite the
bullet and absorb the hike. Until this happens the standard of living will continue to drop.
I agree with you in theory. Practically speaking, my opinion is that the benefits of financing the U.S. government from tariffs would be swamped by the drop in effective peacetime GNP due to the collapse of world trade. What you suggest would require effectively turning our backs on the global trade system, even if we could find a legal way to impose tariffs within the existing treaty system. Without the U.S. as its champion, the global trade system would fragment and trade would collapse.
Not to mention the death, destruction, and wasted capital of the modern warfare which would surely follow. As a specific example, China would abruptly no longer be dependent on the U.S. for its markets. The easiest way to employ their people would be in the military and in military production--and they would have no reason to hold back anymore.
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