More Proof The Economy Is In Trouble

Three economic reports today provide more evidence of the sharp economic slowdown into stagnation.

By far the most important, the Bureau of Economic Analysis reports that total nominal wages and salaries fell by 0.1% in June with the percentage decline for private business twice that for government despite the sharp reduction in temporary Census workers in June. Additionally, earnings of non-farm entrepreneurs and the self-employed plunged by 0.5%.

But, dangerously, prices also fell by 0.14% in June while total nominal personal taxes paid fell by 0.18%. This, plus a 0.3% nominal rise in government payments to individuals and a 0.2% gain in unearned incomes allowed total real disposable (after-tax) incomes to rise by 0.2% and – with population growth – real disposable incomes per capita to rise in June by 0.1%.

Total nominal consumer spending was down slightly (by 0.03%) in June but with falling prices, total real consumer spending was up 0.12%.

(Click here for charts that illustrate the statistics in this post.)

Beware reports that cite only the nominal change without indicating that it is nominal. It is always best to refer to “real” changes and especially important now to note spreading deflation pressures. Even when properly understood, deflation – for the second consecutive month – and the composition and weak real growth of income and spending in June indicate an economy in serious trouble, with too little demand, too many imports and too much idle capacity.

As with last week’s GDP report, BEA also revised all monthly income and spending data back to January 2007. As with the GDP report, the revised information shows the recession was deeper and the rebound of income and spending is generally weaker. Total (NOT per job) real compensation of all workers in non-farm establishments is down 4.6% in June from 30 months ago when the downturn officially began in December 2007. This was revised very little. But total real earnings of non-farm entrepreneurs and the self-employed are down 6.9% in June from their December 2007 totals. This is a much sharper drop and much slower recovery than BEA’s previous estimates.

Total price-adjusted personal taxes paid in June are down 28.9% from when the recession started (also down from January 2009) while government stimulus and other payments to individuals (including Social Security and unemployment insurance) are up 26.4%. This large decline in tax payments and almost equally large increase in personal receipts from government more than offset the decline in real wages and entrepreneurial earnings allowing total real disposable incomes to rise by 2.9% with “average” per capita disposable incomes rising by 0.7%. (Of course, with today’s extreme polarization in income, most American’s real incomes fell over the past 30 months, many sharply.)

With total real disposable incomes rising, real consumer spending has also protected during the most severe months of the downturn and has been generally rising over the past 14 months. Nonetheless, total real consumer spending in June remained 1.0% less than in December 2007. This severely constrained consumer spending – far weaker than previously estimated – had many negative consequences for job creation and the economy but it did allow households (again, on misleading “average”) to begin rebuilding savings after the lowest three-year period of savings since the early 1930s. Still, total personal savings of only 6.4% of total disposable incomes in June 2010 remains extremely low by historical standards, even without considering today’s record high personal debt ratios and record low levels of home equity.

Separately, the Census Bureau reported today that the nominal value of new orders for manufactured goods fell by 1.2% in June after plunging 1.8% in May; even excluding volatile orders for Transportation equipment, Manufacturing orders fell 1.1% in June, by 1.2% in May and by 0.7% in April after spiking up sharply and hopefully last March.

Similarly, the National Association of Realtors reported this morning that, with the end of the federal home-buyer credit, pending home sales continued falling in June, down another 2.6% after plunging 29.9% in May. The index is down 18.6% year over year.

More and more economic indicators point to sharp deceleration or decline in the economy as federal “stimulus” programs have begun to fade. Friday’s jobs and wages report will provide even more useful guidance than usual on how difficult may be the months ahead.

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