Income numbers paint less-than-rosy picture

Earnings show little growth

Bloomberg News / August 29, 2008
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WASHINGTON - Meager gains in earnings over the last year signal the US economy is in much deeper trouble than growth estimates indicate, economists said.

Gross domestic income - or the money earned by the people, businesses, and government agencies whose purchases go into calculating gross domestic product - rose 0.3 percent in the 12 months ended in June, after adjusting for inflation, according to Bloomberg calculations based on yesterday's Commerce Department growth report.

"The income side of the economy, with profits down for four straight quarters and employment falling, looks like a recession," said John Ryding, chief economist at RDQ Economics in New York.

Incomes last quarter grew 1.9 percent at an annual rate after adjusting for inflation, little more than half the 3.3 percent gain posted for GDP, according to Bloomberg calculations.

The figures showed incomes dropped in each of the prior two quarters.

"What you are seeing is more legitimate economic weakness in the income numbers," said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Conn. "The GDI numbers raise the potential that GDP is overstating growth."

The 1.9 percentage-point difference between GDI and GDP over the last 12 months is the biggest in the post World War II era.

Corporate profits were down 7 percent in the year to June, the biggest drop since the last economic contraction, in 2001, according to the Commerce Department. The government also said wages and salaries increased by $52.5 billion in the first three months of the year, $20.2 billion less than previously estimated.

The income numbers are more in line with other figures that indicate the economy struggled from April through June. The jobless rate was 5.7 percent in July, up from 5.1 percent at the end of the first quarter, according to the Labor Department.

"I'm looking at the labor market, and the GDP income numbers make more sense," Ryding said. "It certainly did not feel like 3.3 percent growth."

The earnings data may more accurately predict the start of economic contractions, according to researchers at the Federal Reserve.

Income adjusted for inflation "has done a better job recognizing the start of recessions than has the growth rate of real GDP," Jeremy J. Nalewaik, a Fed economist, wrote in a December 2006 report. "Placing an increased focus on GDI may be useful in assessing the current state of the economy."

While the income and growth figures should theoretically match, the different methods used in calculating the numbers prevent them from converging fully.

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