Economic recessions are characterized by the behavior of four economic indicators - real personal income, real business sales, industrial production and employment. The disparity in performance during this recession between income and production suggests interesting changes in economic behavior compared to the typical recession.
Putting a Framework on Recession: A Difference From the Past
In our opinion, four monthly economic indicators provide the framework for this recession. What is presently intriguing but also ominous is the disparity between income and production. Employment, as shown in the top graph, has broken down sharply relative to the typical weakness of prior recessions. For most readers, there is no surprise that the current decline in employment has been so sharp. Job losses have been significant in size as well as breadth with large declines in manufacturing, construction and now retail and financial services.
Second, industrial production has also exhibited a dramatic breakdown relative to its behavior in prior recessions (see middle graph). This also should come as no surprise to those familiar with the headline news of structural challenges facing the auto industry as well as housing-related durable goods such as appliances, rugs, etc.
However, what is rather interesting is the behavior of income does not reflect the same degree of dramatic decline in economic activity that one senses in employment and production. In this case, the disparity between production and income suggests both cyclical and structural changes that may signal an evolution of the character of the American business cycle.
Automatic Stabilizers and Public Policy
Income gains relative to job losses may reflect the beneficial combination of automatic stabilizers and quick policy action. Income gains no doubt reflect the benefits of unemployment insurance as an automatic stabilizer as they are intended to be. In the latest month, reduced income tax payments also contributed to income gains for households as has the latest indexing for Social Security. In the months ahead, we expect that after-tax, disposable income will rise as withholding tables are altered for the new tax provisions.
Signs of a Less Employment Dependent Society?
Perhaps what we are beginning to see is a society that, at the margin, may be less dependent on employment for its income than what we are accustomed to in the past. Of course, this does not apply to the majority of people of working age, but there appears to be a sense that transfer payments, either by welfare or Social Security-especially the rapid rise in disability payments in recent years-has given rise to income gains that are much stronger than one would have expected if the focus was just on jobs. For example, in the first quarter we saw a gain of 2.2 percent in consumption spending despite a decline of over 700,000 jobs on average over the three months of the quarter. Is the link between jobs and spending weakening or are households simply over-smoothing their consumption?