Tuesday, February 21, 2012

Does the recovery have legs? Part 2: The income strikes back

I think the single most important indicator to predict our near-term economic growth is personal income growth. This follows from my previous posts, where I suggest that consumer spending is the key to our recovery, and it's no great insight to suggest that for spending to grow, income must grow. This is particularly true in an environment like ours, where consumers are generally over-indebted and therefore are less likely to use debt to increase spending.

This chart shows growth in compensation people receive from private businesses. This is strictly private wages - that is, I've excluded things like the income of government employees, investment earnings, income from social security and other government programs, and indirect compensation like employer pension contributions. The idea is to specifically focus on the personal income most sensitive to our growth trajectory: the payrolls of businesses.

The story this tells is something of a mixed bag. We are not seeing consistent growth over each of the last few months, and what growth there has been is lower than the gains we saw Jan-Feb 2011 or even Mar-May 2010, for that matter. On the other hand, the last 4-5 months overall look better than the 4-5 before them. So, the jury is still out here, which makes it all the more important that we follow this closely over the next few months. The report on January's performance comes out March 1, and we should be looking to see if private compensation grew more or less rapidly than it did in December.

My guess - and it's only a guess - is that the report will show that January's wage growth was good, and I'm basing that on the chart below, which shows that the number of people submitting claims for unemployment insurance has dropped more in the last 8 weeks than in the previous 8 months.

It would stand to reason that if private payrolls are expanding, unemployment compensation claims would decline. However, there are other factors that drive these numbers - for example, maybe people stopped filing claims simply because they exhausted their eligibility - so it's just a speculation, but I'm optimistic.

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