Weak Income Numbers
Today’s release of the personal income data for June confirmed a couple of things: that a stimulus should not be in the form of cash or tax refunds, and that consumers face a long hard road in this recession.
First the numbers: both personal and disposable income fell by 1.3% in June. This compares with an increase in May of 1.3% and 1.6% respectively.
The big shift came in the form of stimulus checks which were received in May but had worked through the system by June. The underlying economy, i.e. activity not related to the stimulus, lost ground slightly, as it has now for many months.
The steady negative impact of corporate retrenchment showed up in the loss in wages and salaries, which fell $28.6 billion in June alone. Had it not been for the stimulus package there would have been no income growth this year at all: wages are losing ground steadily which could potentially derail any recovery. Private sector wages fell 0.6% and are declining at a 11.1% annual rate. Clearly that sets up a deflationary concern were other aspects of the economy to be caught up in the decline.
From the looks of things consumers took their stimulus cash and saved it: the savings rate, as a percentage of disposable incomes, actually fell somewhat in June to 4.6% from May’s 6.2%, but that May figure was obviously the result of stimulus cash being set aside as savings.
On the flip side: the decrease in savings between May and June could imply that some of the money set aside in May was spent in June: personal consumption expenditures did rise slightly, by 0.4% unadjusted for inflation.
What does this all mean?
- Don’t waste your stimulus on tax refunds. All the evidence supported the notion that tax refunds are very bad as a stimulus: people sensibly stash that cash away by repaying debt or simply saving it in the bank. Unfortunately those of us who argued against having tax refunds as part of the stimulus package were overruled. And equally unfortunately, events have borne out our fears. Stimulus has to be in the form of hard projects that employ people: construction being an obvious example.
- As long as the employment outlook stays the way it is, it is difficult to paint a very optimistic picture for incomes: wages will remain under pressure. While I applaud the rediscovery of thrift by the American consumer, it is coming at the wrong time. In order to maintain any recovery that might appear in the third quarter, at least at any pace, we need consumption to revive. These income figures cast a strong doubt as to the viability of any prediction for sustained growth. On the contrary: as long as wages decline, and as long as business focuses on cost containment rather than growth, it remains possible that we slip into a downward ‘paradox of thrift’ cycle. That means a ‘double-dip’ recession is a distinct possibility.
While the odds are slightly more stacked in favor of growth over the next few quarters, that growth is beginning to look very weak. Whatever recovery we are now getting seems to be entirely focused on inventory adjustment and is not broad based enough to inspire a great deal of confidence.
So the recession may end this quarter. But we still won’t feel that great.
