Saturday, April 12, 2008

Real income still not indicating a recession

Although so many people are so convinced that a recession is already here, it is worth noting that real income is not indicating that a recession is here, yet. The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) defines a recession as:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.

And when they say "real income" they later tell us that they are using "personal income less transfer payments.":

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. We also look at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

Although a lot of people point to the three or four month decline in payroll employment is a primary indicator that "Aha! The economy is in recession", the committee lists real income first for "particular emphasis." Besides, the total employment decline in the past three months was still quite modest.

I looked at the personal income and outlays report and it appears that "personal income less transfer payments" is the same as real disposable personal income.

So, where are we on real income? In short, the most recent data point, for February, was at an all-time high.

In truth, there was in fact a peak in real income back in September, with consecutive declines in October and November, but we have now seen three consecutive monthly gains since November, culminating in that peak in February. We won't have the March data point until the end of April.

Real income (real disposable personal income) in February was 0.87% higher than the previous peak in September. That is not what you would expect to see in the economy was in a recession.

Now, none of this means that we will not "slip" into recession any day now, but at least this one of the top five indicators used by the NBER committee is not signaling a recession at this time.

-- Jack Krupansky


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