Many talking heads and the stock market are celebrating the Personal Income and Outlays data for July 2011 that was released this morning by the Bureau of Economic Analysis. Was the data positive? Sure, but certainly one month is not an indicator of long term trends. Our economy has some deep issues and one month of positive numbers won’t make these issues disappear.
Maybe it’s best to show the data in pictures. Now, instead of just showing totals for personal consumption expenditures, disposable personal income and the like, I will show changes from previous year. This should give a better perspective on the situation.
1) Personal Consumption Expenditures.
2) Personal Income
3) Disposable Personal Income
Not surprisingly personal income and disposable income (personal income minus taxes) are kind of flatlining. Oh, I digress.
There are several deeper issues to all of this. We had what economist Richard Koo called a “balance sheet recession”. Basically, families and businesses took on a lot debt based on inflated asset prices. Then sometime in 2007 the House of Cards came tumbling down. Families and businesses turned to paying down massive debt loads instead of buying stuff or consuming. For an economy driven by consumption (over 70% of GDP) having families paying off debt instead of consuming or investing is bad.
One deep issue is what has actually changed from the beginning to the Great Recession until now that will positively impact our economy? I suggest nothing. Sure, Wall Street and corporate profits have bounced back nicely and there was a weak fiscal stimulus the effects of which have worn off but now the emphasis is on deficit reduction. High unemployment will continue to suppress family incomes and debt loads are still high.
Another deeper issue is whether families will continue to pay down debt or even have the means or incomes to do so? Are families essentially still tapped out and still struggling with stagnate wages and higher living costs? We will see. One month of good numbers won’t provide answers to these questions.
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