Personal Income

On Friday, the Bureau of Economic Analysis (BEA) released their monthly report of personal income, the total of income from wages, salaries, government benefits, interest and dividend payments and rental income. 

Total personal income rose just .1% for the month of September but wages and salaries showed a more healthy .3% monthly increase after declining .1% in August.  Interest income and government benefits remained flat.  Year over year, income increased 4.4% – more than the seasonally adjusted 3.6% increase in inflation.

In this country there is a feeling that something fundamental is wrong. Many are waking up to the fact that the national myth of Equal Opportunity may be just that – a myth. For decades, people have started small businesses using the equity in their homes to survive the cash flow crunch of the first years of a small business. The decline in housing prices has left many without that traditional capital cushion.

A few weeks ago I wrote about the decline in the median income over the past decade.  Today, let’s look at the big picture of personal income.  Below is a Federal Reserve chart of inflation adjusted personal income for the past fifty years. (Click to enlarge in separate tab)

After a big dip in the past recession (shaded on the chart above), total personal income has returned to about the level it was at the start of the recession in December 2007.  Below is that same chart zoomed on the past five years of inflation adjusted income.

To see the underlying strength or weakness of income, we need to take out transfer payments, which are government checks for benefits of all types.  After all, this is just tax money taken from Paul to pay Peter. The Federal Reserve conveniently gives us that data.

A zoom in on the last five years of inflation adjusted personal income shows the economic sickness that many people vaguely know in their hearts.  After rising from a trough in the 3rd quarter of 2009, real personal income has stagnated the past year.

What this data doesn’t do is adjust for the increase in population.  Although the Federal Reserve charts per capita disposable personal income, they do not chart real personal income less transfer payments on a per capita basis.  Using population figures from the Census Bureau, I was able get a picture of the income data, one that has serious implications for the future.

In 2011, we have finally reached the 2001 level of income.  Despite all the productivity gains of the past decade, we are back to where we started.  As I have pointed out before, the productivity gains are going to the very top incomes.  Below is that same chart, but focused on the past ten years.

As the boomers retire in ever increasing numbers they will be receiving Social Security checks, a transfer payment, which will put downward pressure on personal income less transfer payments.  The long term chart of personal income less transfer payments reveals a familiar and disturbing pattern familiar to stock chart watchers – the head and shoulders pattern – which indicates a dramatic drop in the future.  Confirming this ominous sign are the uncompromising unemployment figures – over 16% of the working age population is either un- or under-employed.  How are these fewer workers with relatively stagnant real incomes in the production of goods and services going to generate enough tax revenues to pay for the increasing transfer payments?

Retail Sales

A week ago the Census Bureau released the Advance Monthly Retail Sales report for September.  When adjusted for seasonal factors and holidays in the reporting period, September sales showed a slight 1.1% increase from August and an almost 8% increase over September 2010 sales.  A tepid – but better than expected – employment report the previous week and growing consumer sales has countered fears that the U.S. might be entering a double dip recession. Hopes that Europe will reach some resolution to their debt crisis and the reduced fears of another recession have helped power the stock market almost 15% higher from its October 4th lows.

Has the U.S. consumer come back?  Below is a 20 year chart of seasonally adjusted retail sales in inflation adjusted dollars.  As you can see, we are still struggling to reach the levels of 2007.

The Christmas season can account for 40% of many retailers annual sales.  The other nine months of the year, from January to September, show the underlying resilience of the consumer economy. I pulled up the September Advance Monthly reports from the Census Bureau for recent years to get a comparison. I used Bureau of Labor Statistics CPI data to show sales in real dollars.

Although we have finally surpassed the nine month total of 2008 in current dollars (violet bars), the inflation adjusted sales figures show that we are still below the levels of 2007 and 2008.  State and local governments rely on sales taxes for about a third of their tax revenue.  The Census Bureau reported that sales tax revenue for state and local government in 2010 was $17 billion less than 2007, a 4% decrease.  In inflation adjusted dollars, the decrease in sales tax revenues is almost 12%.

How have state and local governments made up the shortfall in sales tax revenues?  Corporate income taxes increased 50% from 2007 to 2010, more than making up for the decline in sales tax revenues.

Property taxes make up 30% of tax revenues for state and local governments.  Given the sharp decrease in house prices, I would have expected that property tax revenues would have declined but changes in property taxes lag changes in the market price of houses.  In 2010, property tax revenues were 10% above 2007 levels, double the 5% inflation rate for that period.  Although 2011 figures are not available yet, I would expect that property taxes declined this past year.  State and local governments are praying that there is a pickup in retail sales to compensate for reduced property tax revenues.

The bottom line?  The pressure points may shift but the pressures on the economy as a whole remain constant.  Private industry continues to add enough jobs to compensate for population growth and reductions in the workforce of state and local governments but not enough to bring down the unemployment rate.  Revenues to state and local governments may show slight improvement but not enough to keep up with inflation, and certainly not enough to rehire these lost government jobs in the near future.


The headline from a recent report by the Census Bureau revealed that the men’s median (50% made more, 50% made less) inflation adjusted income is now less than it was in 1968.  Looking behind the headline at half a century of data uncovers some trends that surprised me.(Click to enlarge in separate tab)

Men’s median earnings during this mother of all recessions have actually been better than the recessions of the early nineties and early eighties.  What distinguished the recession of the early 2000s was that median earnings did not decline, probably due to the growing boom in the construction industry at the time – a boom that would blow up the economy in 2008.  What is apparent is the two decade “Camelot” period of the post war period when median male incomes steadily increased.

1979 was a historic year when there were more women in the workplace than men. How have full time employees of both sexes done in the past thirty years? Data from the Bureau of Labor Statistics shows a overall slight increase in median inflation adjusted earnings during the past decade.

The increased production of workers during those thirty years has been strong – far more than the slight increase in earnings.

As I noted a few weeks ago top incomes have been growing far more than the median income.  Productivity gains produce greater profits. Those profits have largely gone to employers, not the employees. 

Social Security COLA

Many seniors receiving Social Security pay attention to the Consumer Price Index (CPI) once a year in November when the Social Security Administration (SSA) sends its annual notice of the cost of living adjustment (COLA) for the next calendar year. Although Social Security payments are set for a calendar year, the adjustment is based on the change in the CPI during the Federal Government’s fiscal year, which runs from October thru September.  On October 19th, the Bureau of Labor Statistics (BLS) will announce their monthly CPI figure for September, effectively giving Federal agencies their annual COLA figure.

Following this announcement from the BLS, the SSA will start drafting their notices, which they will send out in November.  Based on previous CPI data from the BLS and a seat of the pants estimate for September, I would guess that the COLA adjustment will be about 4.1%, an increase of $50 a month for the someone who receives an average monthly benefit of $1200.

What is good for seniors is not so good for Federal budget makers.  In August of this year, SSA paid out almost $60 billion in Social Security benefits to 55 million beneficiaries.  Multiply that monthly figure by 12 to get an annual payout of about $720 billion, or about 20% of the total amount of money the Federal government will pay out this year.  Now add a 4.1% COLA, which is about $30 billion extra that will need to be paid out next year.  Social Security taxes collected will just about cover the payments, leaving nothing extra for the Federal government to “borrow” from the Social Security trust funds.

Defense spending, including benefits, medical care and job training for retired vets totals more than a $1 trillion, or almost a third of the total federal budget, far more than the 25% spent during the years of the Reagan administration.  In a speech this past week at the Citadel, a military academy,  Mitt Romney, the leading Republican presidential contender, announced that, if elected in 2012, he would expand military spending even more than current levels.  How will he pay for this further build up?  If there is a Republican congress, there won’t be any tax increases.  That leaves only two alternatives:  drastically increase the federal debt more than Bush and Obama have already done, or get the money where he and the Republican congress can get it from – Social Security beneficiaries.  The bond market won’t let Romney run up too much more debt so that leaves only one alternative – reduce benefits to seniors.  Unlike younger people, seniors vote so the plan will be along the lines that Eric Cantor, the House Majority Leader, proposed this past year: keep benefits the same for those already retired and soon to retire and reduce future benefits for those 55 and younger.  That will be the starting place.  Next will come an adjustment to the calculation of the COLA.  As you can see above, a reduction in the annual Social Security COLA may be the weekly food cost for a thrifty retiree but means billions of dollars in money to the Federal government – billions that Romney can spend with defense companies.

Voters have two choices:  Get angry before the politicians screw us when we have some chance to change the outcome, or get angry after they screw us. 

Debt Comparison

As this past quarter began in July, Greece’s debt was a concern but the countries of the EU were in negotiations to work it out.  QE2, the Federal Reserve’s program of bond buying, had just ended, prompting some to worry about a negative effect on the economy as that stimulus.   Early second quarter earnings reports in mid July were strong and the balance sheets of major companies showed that they had accumulated ample reserves of cash to weather any small downturns. Manufacturing was slumping a bit but that was attributed to supply chain disruptions from the March Japanese tsunami and was expected to grow again in the third quarter.  The moribund housing sector and stubbornly high unemployment remained a concern but the stock market is a pricing of future company earnings.  The companies in the S&P500 which have any foreign earnings receive the majority of their earnings from countries other than the U.S.  This global sales and revenue base makes these large U.S. companies less vulnerable to economic weakness in any one country.

Japan’s recovery in GDP in the second quarter surprised many, testifying to the resilience and industry of the Japanese people and Japanese industry.  China, Indonesia, India and Brazil were showing strong growth, perhaps a bit too much growth, as inflation in those countries and regions was prompting central banks to take steps to cool that growth.  Growth in the EU countries was a concern but German manufacturing was holding steady.

Toward the end of July, the EU reached an agreement to provide financing to Greece and, in the U.S., President Obama and House Speaker Boehner supposedly reached an agreement – dubbed the “grand bargain – for debt reduction.  On July 22nd, the S&P500 closed near 1350.  At the end of September, the S&P500 stood at 1130, a drop of 17%.  What happened?

The weekend after the “grand bargain” came news that there was no bargain.  During August, the American people stared in befuddlement at a dark comedy in which lawmakers and the President brought the country to the brink of default, prompting one rating agency to downgrade U.S. government debt. 

Computing the Gross Domestic Product (GDP) of an entire nation is a complex affair, one that requires an early estimate and two revisions. In the late days of July, the Bureau of Economic Analysis (BEA) revised the GDP growth for the 1st quarter of 2011 (ending in March) from a weak 1.9%  to an almost recessionary .4%.  This was a large revision and shook the markets, swiftly dropping the S&P500 index to about 1100. 

Germany reported strong manufacturing data for July but China showed a stalled growth in their manufacturing, adding to worries about a global slowdown.  Since early August, the market has behaved like a small boat in the Mid Atlantic, rising and falling dramatically with both news and worries about Greece’s debt as well as the debt of Italy, Spain, Ireland and Portugal.  Investors have fled from the stocks of banks holding the debt of those countries as well as larger banks which might have indirect exposure to that debt.  An index of large banks has fallen 28% since April of this year.  Many developed countries are wallowing in debt.  A slowdown in growth leads to less tax revenue to pay down that debt.  Worries of a global recession or a severe slowing of growth provoke fear of bank defaults, government defaults, and growing pressure on small and medium sized businesses, who are least able to withstand downturns in an economy.

Fractious meetings among EU member countries, among the various branches of the U.S. government leads many to regard politicians on both sides of Atlantic as dysfunctional, unable to resolve their ideological differences to make any functional policy decisions.  Investors worry about the viability and future of the euro currency, fleeing the Euro and parking their money in U.S. Treasuries, causing the price of Treasuries to rise and the yield (interest) on those bonds to fall to historically low levels.

In September, an HSBC index of small and medium Chinese manufacturers reported a slight contraction.  German manufacturing declined from strong numbers in July to a neutral stall speed in September, confirming fears of a global slowdown. 

In the U.S. and Eurozone, governments at all levels have instituted austerity measures to cope with declining tax revenues.  Government employee layoffs increase the demand for social support programs, prompt civilians to curb their spending, resulting in less tax revenues for government, prompting more government cuts, ad nauseum.  Cautious companies hoard what cash they have, reduce their investments in anticipation of further slowdowns in consumer demand.

Weighing on the economies of the U.S, Japan and Europe are a decades long accumulation of debt.  Below is a chart of OECD data on the total debt of developed countries.  Debt in the U.S. doesn’t look bad compared to some of these other countries. (Click to enlarge in separate tab)

For the past thirty years, all of us in the U.S. have been running up debt.  People, companies and governments at the Federal, State and local levels have borrowed…and borrowed…and borrowed some more. 

The severely slumping U.S. housing market is a strong headwind to any GDP growth.  Lower valuations lead to less property taxes for local governments and schools, reduced government services, houses that are difficult for homeowners to sell without bringing cash to the sale. A recent report by the Commerce Dept. showed that housing has contributed an average of 4.7% to GDP for the past half century.  Last year, housing contributed only 2.2% to GDP.  If the health of the housing sector was just average, GDP growth in this country would be 2.5% higher.   Some in the industry anticipate that it will be another five years for housing to recover from the excesses of the past decade.