Dr. Sherry Jarrell

Where did U.S. Incomes Go?

I've taken the liberty of reprinting in its entirety a recent piece by Karl Denninger of Market Ticker on the state of U.S. incomes.  This piece helps underscore the inescapable reality that private industry drives our economy.

"It appears that the Federal Tit Pump is running out of power...

Personal income increased $1.2 billion, or less than 0.1 percent, and disposable personal income (DPI) increased $1.6 billion, or less than 0.1 percent, in February, according to the Bureau of Economic Analysis.  Personal consumption expenditures (PCE) increased $34.7 billion, or 0.3 percent.

Oh boy, now the $1.3 trillion in additional deficit spending is no longer contributing to personal income!  That's not so positive - indeed, it's not positive at all.

Private wage and salary disbursements increased $2.0 billion in February, compared with an increase of $16.6 billion in January.  Goods-producing industries' payrolls decreased $3.5 billion, in contrast to an increase of $5.2 billion; manufacturing payrolls decreased $1.4 billion, in contrast to an increase of $5.0 billion.  Services-producing industries' payrolls increased $5.5 billion, compared with an increase of $11.4 billion.

Goods down.... uh, where's our so-called economic recovery? 

Proprietors' income decreased $6.1 billion in February, the same decrease as in January. Farm proprietors' income decreased $7.1 billion, the same decrease as in January.  Nonfarm proprietors' income increased $1.0 billion, the same increase as in January.

Very little change in proprietor's income ex farming, but farmer income is down significantly.

Rental income of persons increased $2.2 billion in February, compared with an increase of $1.9 billion in January.  Personal income receipts on assets (personal interest income plus personal dividend income) decreased $16.5 billion, the same decrease as in January.

Rents up a bit, but dividends are down huge, continuing a trend.  This is not positive at all, and implies that assets are being sold to continue lifestyle choices.  This leads to a question that has begun to gnaw at me: Have we begun to cross into where boomers start pulling funds out of asset classes to live on?

Personal current transfer receipts increased $16.6 billion in February, compared with an increase of $29.8 billion in January.  The January change reflected the Making Work Pay Credit provision of the American Recovery and Reinvestment Act of 2009, which boosted January receipts by $19.8 billion. The Act provides for a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers.  When an individual’s tax credit exceeds the taxes owed, the refundable tax credit payment is classified as “other” government social benefits to persons.

Government to the rescue!  $45 billion worth in the last two months, to be specific.  That's a direct $270 billion in handouts, or 2% of GDP - and that's only the direct handouts!  So subtract that off GDP and..... (oh, and don't forget the rest of the $1.3 trillion too.)

Nothing to see here folks, as in "no evidence of sustainability in the recovery."  We have a government that continues to "prime the pump" but there's no water at the bottom of the well to generate self-sustaining economic growth. 

by Karl Denninger

Latest US Growth Rate

The U.S. GDP grew at an annual rate of 5.9% in the last quarter of 2009 which may look good at first glance, but when we dig a little deeper, we find some concerns about the implications for sustainable growth.  A large fraction of this reported growth came from businesses selling off accumulated inventories, which has more to say about past production than current. Exports were also a significant source of fourth quarter growth, driven in large part by a weak dollar.  Of course, a weak dollar is a very mixed blessing for the economy, and is hardly a sign of a strong or recovering economy.
 

Real residential fixed investment increased 5.0 percent, helped along by the extension of the home purchase tax credits from the federal government. 

Real nonresidential fixed investment increased 6.5 percent. This figure nets out nonresidential structures, which decreased at a troubling rate of 13.9 percent, and equipment and software, which increased 18.2 percent. Investment in equipment and software consists of capital account purchases of new machinery, equipment, furniture, vehicles, and computer software; dealers’ margins on sales of used equipment; and net purchases of used equipment from government agencies, persons, and the rest of the world. Own-account production of computer software is also included, which is production performed by a businesses or government for its own use.  

Again, the underlying figures show that those variables most associated with building a sustainable productive capital base for the economy – nonresidential fixed investment –are declining at an alarming rate. This, combined with a 9.7% unemployment rate and the specter of rising debt levels, energy prices, and taxes, paints a picture of a slow to non-existent recovery to a robust economy any time in the next year. 

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

U.S. Growth Rate Revised Downward

As expected, the Commerce Department http://www.marketwatch.com/story/us-third-quarter-economic-growth-revised-to-28-2009-11-24 has revised downward its estimate of the U.S. growth rate from the third quarter of 2009. Citing weaker consumer spending than originally estimated, the annualized growth rate is now 2.8%, down from 3.5%, far too weak to make any progress on the employment front. 

Housing and the Recovery

As an economist, I am frequently asked for my predictions on when the economy is going to turn around.  Have we reached the bottom?  Have we begun to recover?  Might we go into a second, perhaps more severe recession? 

Those are tough questions to answer.  Business cycles are notoriously difficult to predict.  In fact, about the only thing we know for sure is that no two business cycles are alike. Each is unique in some significant way. 

Changes in the housing market may be one of the most meaningful indicators of a recovery, because housing stability is such a fundamental indicator of how households are budgeting their income.  Notice that I did not say that the level of homeownership was a useful indicator; instead, I look to changes in the housing market, either away from or toward an apparently sustainable and affordable supply of homes, for evidence of where in the business cycle the economy may be.

Despite record low mortgage rates and first-time home buyer credits, the U.S. housing market remains anemic.  Rising foreclosures in several major metropolitan areas will keep housing prices low for some time to come.  The U.S. currently has about 1.7 million excess housing units available.  Typically, about 1.3 million new households are formed in the U.S. per year.  But with the unemployment rate topping 10%, new household formation will fall to about 1 million per year.  If new home construction remains at its current level of about 600,000 units per year, it will take over 4 years (1.7 million/400,000) for the excess supply of housing to be absorbed and housing prices to recover. 

Recovery rates will be much slower in some markets, such as in Florida, Nevada, and California, but I believe that the rest of the U.S. along with most other developed economies are looking at a three- to four-year period of time before housing and thus the overall levels of output return to their pre-recession levels.