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November 18, 2011

Recessions and Income Declines
By Nat Kellogg, CFA, Associate Director of Research

This chart looks at the drop and recovery in real personal income during recessions over the last 50 years (personal income is shown as a percentage of the previous peak to look at prior recessions on an apples-to-apples basis). The red line (Real Personal Income less Current Transfer Receipts) shows inflation adjusted after-tax disposable income not including government support (i.e. net social security receipts, unemployment insurance, etc.). The gray line (Real Disposable Income) shows inflation adjusted after-tax disposable income including government support.

A few things stand out. First is the depth of the 2008 - 2010 recession, which was far worse than any prior drop in U.S. incomes. Second, this chart shows the role of government support during recessions, as the drop in real disposable income is far less than would otherwise be expected, due to government support. Thirdly, the drop in real disposable incomes over the last three months is a worrying trend. This is especially true given the growing talk in Washington over reducing government support of disposable income through higher taxes and/or lower spending.

Falling real incomes and less government support does not bode well for U.S. economic growth over the coming quarters.

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