Recovery in Personal Income Has Yet to Begin

Includes: DIA, QQQ, SPY
by: Jason Tillberg

So much of the American economy depends on its citizens to both be productive, in order provide the goods and services domestically needed rather than have to import them, and be employed with a paycheck, so they will not have to rely on social welfare payments to make ends meet. Both are still in dire straits despite massive stimulus.

Employment in manufacturing related industries in America has plummeted drastically as our manufacturing base continues to disintegrate.

See the total number of employees in both non durable manufacturing and durable manufacturing. You can thank free trade for that. (Ironically, the very first act of Congress was a Protective Tarriff).


As the total number of employed Americans has also plummeted with only a slight gain in recent months, income from wages has fallen.

See the total number of employed Americans and my chart of income from wages, which I got off of the Federal Flow of Funds report, pg. 14.

Below, personal income from wages reached its lowest level (since recession began) in the 4th quarter of 2009.

Now let's look at total personal income.

How is it, you might ask that personal income has been increasing throughout 2009 as the total number of Americans employed and income from wages kept falling? The answer is that government social welfare payments is making up for that. Robbing productive Peter to pay poor Paul.

David Rosenberg of Gluskin Sheff put together this chart showing the percentage of personal income coming from government transfer receipts.

Personal income for the 4th quarter of 2009 was $12,114.3 billion. Total federal government social benefits and other transfer payments were $1,672.7 billion and $528.4 billion respectively, for a total of $2,201.1 billion. That puts the percent of personal Income derived from social benefits at 18.17% for the 4th quarter of 2009.

Meanwhile, the savings rate has been dropping: since peaking in May of 2009 at 6.4%, it has fallen to 3.1% in March of 2010 as more and more Americans have to dip into what's left of their savings to pay for necessities like food, clothing and gas for their car. Either that or buying Kindles (NASDAQ:AMZN) and iPads (NASDAQ:AAPL). I would have expected the savings rate to rise for sure given the level of crisis we're in today and the complete lack of jobs. I suppose sociologists would say when you have such a strong social safety net, the desire to save for a rainy day diminishes.

We just found out earlier this month, that in March the average hourly earnings of all employees on private payrolls fell by 2 cents to $22.47. This was the first time earnings fell month over month since April 2003. That doesn't bode well for any kind of improvement in personal income.

Without government handouts, i.e. extended unemployment, food stamps and other welfare programs, personal income would be down and I'm quite sure that the fundamentals of many retail companies would not be as near as stable as they are today.

I'm not sure how long this can last. China owns $889 billion in US Treasury debt as of January 2010 (see here).

With about 4 Chinese for every 1 American, this means that every American owes 4 Chinese $741. (We also owe the Japanese, the Brits, the Brazilians, the oil exporters, others, and of course, the Federal Reserve - the money printers.)

As of 2007, 620 million, or 47% of the Chinese, live on less than $2 a day.

If you live in NY, you have a family of 4 and make less than $28,668 gross income, you can qualify for up to $668 per month in food stamps.

So, to understand this correctly, we borrow money from China, a country where hundreds of millions are living on less than $2 a day, so we can pay an American family whose household's breadwinner works at Home Depot (NYSE:HD) (they're hiring!) as an associate making $10 an hour ($20,800 per year with 40 hour work week), up to $668 a month for food?

Over 39.4 million Americans collect food stamps as of January 2010. That's more than one in eight that rely on food stamps. One in four children relies on food stamps, and one in 50 Americans lives on nothing but food stamps, per a NY Times aritcle I read back in January.

With respect to unemployment benefits, 11.4 million Americans are receiving unemployment benefits per most recent data. A majority are on the extended benefits, which go up to 99 weeks, or nearly 2 years.

Government transfer payments are simply making up for the shortfall in personal income from "work." That's your cover up to this crisis.

America is now at the mercy of borrowing money and going deeper into debt in order to provide the necessities of life.

In 2009, total non financial debt increased $1.125 trillion to $34.702 trillion. Yet, GDP fell $185 billion (source: here).

This is known as debt saturation and a concept known as marginal productivity of debt. I understand this as like using a barrel of oil worth of energy to extract 7/8s barrel of oil worth of energy. The ability of the debt to be used productivly has now diminished as debt is used to not only pay interest on debt, but also to be spent on goods and services and not to be invested in increasing productive output per capita per sq kilometer.

Austrian economists understand this very well, as was pointed out back in May of 2009 by John Lounsbury here on Seeking Alpha.

The social safety net of our current depression is on thin ice, in my opinion. Any day now, the ability for the US to borrow money without debasing the currency via further drastic monetization is upon us. Any hint of food inflation or commoditiy induced inflation could spur higher interest rates that could throw the US off course and deny those on the social safety net their benefits. Then all hell breaks loose..potentially.

It's as if we have completely forgotten the old adage, "give a man a fish, he eats for a day, teach a man to fish, he eats for a lifetime." Nearly as many Americans that collect unemployment work in manufacturing today. I'm not even sure whether we still make fishing poles.

America NEEDS work and production for there to be any hope of coming out of this condition without default or without the shutting down of government agencies. This is absolutely not happening. We will see this year that many city and state agencies will simply shut down because they are broke and have failed to create the productive capacity to provide the output neccessary to service the debt and carry on.

Without increases in employment and REAL personal income, not increases in social benefits, there will be no rebound in residential real estate, no rebound in commercial real estate and no rebound in the overall economy. The disintegration will continue and governments will simply begin to shut down and social benefits will become depleted.

Quoting Ron Paul as best I can remember, "money does not grow on trees for if it did, then money would become as leaves do, either bagged up and thrown away or chopped up and used as mulch."

Conclusion: The Green Shoots Mr. Bernanke saw on March 16, 2009 have withered.

Disclosure: No relevant positions

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