The meager gains in earnings over the last year signal the U.S. economy is in much deeper trouble than the growth estimates indicate, economists...
The meager gains in earnings over the last year signal the U.S. economy is in much deeper trouble than the growth estimates indicate, economists said.
Gross domestic income (GDI), or the money earned by the people, businesses and government agencies whose purchases go into calculating gross domestic product (GDP), rose 0.3 percent in the 12 months ended in June after adjusting for inflation, according to Bloomberg calculations based on Thursday’s Commerce Department 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, a little more than half the 3.3 percent gain posted by GDP, according to Bloomberg calculations.
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The figures showed incomes dropped in each of the previous 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 in Stamford, Conn. “The GDI numbers raise the potential that GDP is overstating growth.”
The 1.9 percentage-point difference between the 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 5.5 percent in June, up from 5.1 percent at the end of the first quarter, and employers cut 165,000 workers from payrolls, 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 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 in calculating the numbers prevent them from converging fully.