The ECRI released the following chart on the year-over-year growth in US real personal income.
The takeaway here is that personal income growth is seriously flagging going into the fiscal cliff which promises to turn income growth decidedly to income contraction.
For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last ten recessions. In other words, this is what personal income growth typically looks like early in a recession.
Has personal income growth ever remained this low for three months without the economy going into recession? The answer is no.
While the ECRI are using this in support of their recession thesis, recession is a lagging indicator which is useless for planning purposes. Year-over-year rates of change in leading indicators are the critical factor. Consumer spending makes up two-thirds of the US economy, driving the rate of economic change more than any other variable. The sequence goes: consumers’ real hourly earnings to consumer spending to industrial production to capital spending to corporate profits – that is without consumption support from debt accumulation, government transfer payments and tax breaks.
Employment and business spending are lagging indicators and are not drivers of the business cycle at all. Companies cut investment in human and physical capital as a result of a slowdown in the rate of change in consumption.
Conclusion: the US economy cannot grow for very long if real personal income is decreasing.