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Income & Spending Report Generates Illusion of Gains


Today's numbers don't prove that we're gaining on personal income growth, rather that we're only running in place.

Within 10 seconds of today's income and spending release for July, CNBC's economics reporter, Steve Leisman, spotted the good news. He noted that private wages and salaries were up by 0.4% from last month -- and that this welcome news showed that we're gaining on personal income growth "not by transfer payments alone."

Actually, today's numbers prove nothing of the kind, and might well be nominated for the "running in place via prior period revision" award. I've been closely tracking a slightly broader category called "private incomes" which consists of private wages and salaries plus proprietors' income, rental incomes, and interest and dividend payments. Improvement in these components would be the essence of
"organic income growth" because the remaining significant elements of personal income are transfer payments and public-sector wages and salaries -- both of which are now becoming hostage to the nation's increasingly precarious fiscal condition at all levels of government.

In June, the Commerce Department reported "private incomes" at $8.433 trillion. This figure was $463 billion or 5.2% lower than it had been way back in the third quarter of 2008 before the Wall Street heart attack. So as of June, we were still deep in the hole in terms of the organic income which must ultimately support consumption spending and drive GDP growth. Indeed, it was only an offsetting growth of $460 billion or 13% growth in transfer payments and government wages and salaries during the same period that kept income and spending about flat in nominal terms.

In today's report for July, however, "private incomes" for June were revised down by $24 billion to $8.409 trillion. This permitted July to be reported "up" by 0.3%. "Up" to what? To exactly, $8.433 billion -- the same number reported for June about 30 days ago! So we're still $463 billion below the third-quarter 2008 level on private incomes. Since December 2009 when the recovery allegedly began in earnest, this yawning gap has been closed by a minuscule $13 billion per month. At that rate, it will take us another 35 months to get back to the pre-Lehman level of nominal private income; that is, we would experience no growth in private incomes from mid-2008 until mid-2013. We've seen that scenario only once before, but it was in that unmentionable era just before World War II. Thus, as has been the case repeatedly in recent months, prior period revisions are generating the illusion of gains when we are, in fact, running in place.

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