Monday, February 09, 2009

The Vicious Cycle: Personal Incomes and Expenditures Q4 2008

Keeping with my 2009 theme of the economic downturn spinning into a vicious cycling “prime bomb” let’s look today at how nominal and real personal income and consumption has performed during recent periods of recession.

Looking at the charts below (click for larger) it’s plain to see that nominally, recessionary periods prior to our current have tended to only slightly flatten personal income and personal consumption patterns.

The dot-com recession led to the most notable slowdown in nominal personal income with a 1.45% year-over-year increase seen at the start of 2002 while personal consumption appeared largely unaffected (likely as a result of mortgage equity withdrawal and poor education in matters of basic finance).

In “real” terms though (deflated with the PCE deflator), both personal income and personal consumption expenditures can show more notable flattening and even moderate contraction during recessionary episodes.

Looking at our current period you can see that we are experiencing a substantial decline in personal consumption while personal income is showing, more or less, the typical pattern despite a full quarter of deflationary prices.

Throughout 2009, I would expect that serious nationwide unemployment as well as lower earnings by firms will work to hold down incomes and likely even force them lower in both nominal and real terms.

This will result in a continued pullback in personal consumption expenditures and, in turn, more lower earnings by firms.

The vicious-cycle is now firmly in place with only its duration in question.