June Personal Income Data Points to Anything but an End to the Recession

by: Don Fishback

This is an older article that I haven’t commented on because I didn’t have the data necessary to agree or refute. The lead paragraph begins:

Components of the index of leading economic indicators are signaling the worst U.S. recession in five decades may be over now, not three to six months from now.

Well, Tuesday morning the Bureau of Economic Analysis came out with the personal income data for June, and it wasn’t just bad, it was breathtakingly ugly. The actual measure is real personal income less transfer payments. Basically, it’s an inflation-adjusted measure of income actually earned by people that takes out income derived from payments received from the government, such as unemployment benefits. It’s a key component used by the NBER in dating recessions.

IMAGE RPILTP Has the Recession Ended?

One look at this chart and you can see that there is no sign of an uptick. In fact, it’s the exact opposite. At the beginning of 2009, you had two months where personal income fell off a cliff. Then you had a respite of decelerating declines. Yes, the declines were declines, but they were smaller percentage declines for 3 consecutive months. That trend of smaller declines changed in June, as the pace of the decline picked up speed once again.

The reason why this particular data point is so important from a recession-dating perspective is that in every recession since this data series began in 1959, real personal income starts to rise either prior to or precisely when the recession ends. The one exception to this rule was the 1975 recession where real personal income started to rise the month after the recession ended. The key thing about that 1975 exception was that income did start to rise prior to the end of that recession, but inflation was keeping a lid on the “real” part of the equation until one month after the official end date of the recession. In the current situation, you have no sign that inflation-adjusted or non-inflation-adjusted income is rising.

What all of this means is that, if the recession actually did already end in June, it would be the first time in the 50-year history of this data series that a recession ended while real income was still falling. While that doesn’t rule out an immediate end to the recession, I think it would be extremely unlikely for the recession to have ended with personal income still plunging and accelerating toward the downside. The only good part about this is the age of the data: Tuesday’s release was the June data, not July or August. Perhaps when the July and August data comes out in a month or two, this indicator will look different. I certainly wouldn’t rule that out. Clearly, that’s what the stock market seems to be anticipating.