Incomes Falter …

Financiers and farmers. Agriculture and banking. Somewhere we have heard this story.

I don’t usually pass along the personal income data from the Bureau of Economic Analysis, but today I will because it has some revealing detail. Overall state level personal income growth slowed to 0.7% in the third quarter, down from 1.4% in the second quarter. Obviously this does not augur well for future consumption trends, especially as households are still looking to stabilize their balance sheets in the aftermath of the post-bubble crisis.

What is more interesting is the variance within the data.

Those states whose income is tied to farming or mining, notably those in the Great Plains or the Southwest, saw much better income growth. Texas, for instance, has seen incomes rise at an above average rate all year, and had third quarter growth of 1.0%. Even better was the growth in the farm states such as Nebraska, at 1.5%, South Dakota, at 1.8%, and Iowa at 1.4%. Indeed only Missouri of the Plain states saw income growth below 1.0%. Contrast those rates with New York and Connecticut both of which saw zero growth, or California with its modest 0.5%, and we see that the coastal regions are undergoing much less robust overall income growth than the central states where commodity prices are driving a healthy recovery.

Even more interesting is the variability showing up at the industry level. The reason both New York and Connecticut fared so badly in the third quarter was the sudden reversal in personal incomes in the financial sector. But I am not sure this means much. Even though New York saw finance sector incomes drop by 0.71% in the third quarter they still were 8.0% higher than the beginning of the year. Clearly banking incomes are highly sensitive to the timing of those toxic bonuses, and are such a large part of the overall picture in both New York and Connecticut that we need to look at those states on an annual, not quarterly, basis.

Besides farming and banking, two other industries are worth mentioning: construction is still tanking in most states, and contributed -0.02% t0 overall income growth; and manufacturing, especially in the durable goods sector saw the healthiest growth of all, even better than farming, contributing 0.08%. Lastly those of us who focus on shifts between white collar and blue collar workers will also note that incomes in the “professional and technical” sector outshone everything else, contributing 0.09% to overall growth, and doing especially well in New York and New Jersey. I suspect that consultants, accountants and lawyers who litter Wall Street are hanging in there very well despite all the moaning I hear!

Another cut through the data reveals the enormous differences between small business in non-agricultural activities and those in farming. The numbers for “proprietor’s” income in New York showed income growth of just 0.5%. In Texas it was 0.12% and in California it was 0.4%. Clearly small businesses are being squeezed. But in the farming states the equivalent income group was experiencing a healthy revival: with South Dakota and Nebraska leading the way with 0.82% and 0.75% respectively. These are good times for self employed farmers.

One last observation: rental and dividend incomes are also weak. This is the only aspect of the income report that is common to the entire nation. To put that in context: of the aggregate increase in incomes of 0.7%, 0.51% came from net earnings such as wages and small business income; 0.24% came from transfer payments such as government programs and retirement income; whilst the category including dividends, interest, and rent contributed a negative amount, -0.07%.

This is a little arcane but speaks to the patchy nature of our recovery. It also may help explain some of our politics. There are areas of the country where a recovery is well under way, at least at the personal income level, while other areas are lingering either in very low growth or highly divergent growth. The recent run up in commodity prices is clearly providing a boost to the center of the country. While on the coasts only the professional class is doing well, the rest not so much. Meantime small business is stuck firmly in a rut everywhere. Finally those numbers for dividend and rental incomes mean that our rentier class is not doing too well. No wonder the Tea Party thinks capitalism is under attack. Quite why the farmers are joining them I don’t know.