Wednesday, April 28, 2004

On Thursday the BEA releases the 2004:I GDP figures. On Friday it releases the 2004:I personal income and outlay figures. While most folks are anxiously awaiting Thursday, I'm looking forward to Friday instead.

As we all know, the American consumer never lost a step all throughout the recent recession. The nagging question is always when and why (and whether) he will stop. The fact of unflagging consumption in the midst of very weak real income growth is remarkable (recall that real wages for production workers have been stagnant for some 18 months now). For each of the 12 quarters during which Bush has been President, wage and salary disbursements as a percentage of total consumption has fallen, from 71% in 2001:I to 65% in 2003:IV. The same goes for total employee compensation, falling steadily as a percentage of consumption from from 86% in 2001:I to 79% in 2003:IV. Disposable personal income rose just 0.5% in real terms in 2003:IV while personal savings dropped to just 1.7% of disposable personal income, the lowest levels since the depths of the recession in 2001.

We see more production, more investment and higher profits in the US, all of which will surely produce a nice GDP figure for Thursday. But where is the income to soak up all this production? As Stephen Roach is fond of pointing out, in the US today it is coming from particularly "toxic" sources: open-ended tax cuts, reduced saving, extraction of purchasing power from over-valued assets, and sharply rising household debt. Will the 2004:I personal income data finally show a turnaround in these trends? If not, don't count on the recovery just yet.


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