Consumer spending, which is directly correlated with personal income, is one of the keys to an economic recovery. At first glance, consistently rising personal income figures suggest an economic recovery, albeit a weak one, is at hand. However, the characteristics of the data leaves me very hesitant to say that the worst is over. From the Bureau of Economic Analysis:
Personal income is rising along with consumption, so what makes me so suspicious of these figures? In short, government spending is accounting for an outsized portion of personal income growth. We have yet to see job creation in the private sector, and until we do, we will be bottom bouncing for a long, long time.
Personal income increased $1.2 billion, or less than 0.1 percent, and disposable personal income (DPI) increased $1.6 billion, or less than 0.1 percent, in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $34.7 billion, or 0.3 percent. In January, personal income increased $30.4 billion, or 0.3 percent, DPI decreased $26.0 billion, or 0.2 percent,and PCE increased $38.5 billion, or 0.4 percent, based on revised estimates.
Real disposable income increased less than 0.1 percent in February, in contrast to a decrease of 0.4 percent in January. Real PCE increased 0.3 percent, compared with an increase of 0.2 percent.
Government Spending Bull Market
If government spending were a stock, I would have invested all of my life savings into the stock long ago. There is clearly nothing stopping our government from spending money we don't have to thwart an economic Depression caused by...spending money we don't have.
While the private sector continues to shed payroll month after month, those lucky enough to work for the government have bucked the downward trend in salary disbursements. When governments wantonly spend, growth always stagnates, since the private sector is where all real innovations come from. If you think the government knows how to innovate and spur business growth, just think for a second about the failures known as the U.S. Postal Service and Amtrak. The more the government spends, the less money we have to invest in future economic growth.
Government Transfer Payments
The government has opened up the coffers to anyone and everyone in an effort to placate the large portion of the population that realizes there is no economic recovery. Government transfer payments, which include government unemployment benefits, have risen steadily in a clear sign that there is no organic growth in our economy.
If someone can explain to me what is materially different from the U.S. and countries we would characterize as "welfare states," I would like to know. History shows that government handouts are a temporary expedient that do much more long-term harm than good.
Real Personal Income Minus Transfer Payments
The Twilight Zone economic recovery becomes apparent when we adjust real personal income to account for government handouts. After peaking in 2007, real personal income excluding transfer payments has cratered, and we haven't even experienced the obligatory dead cat bounce.
We all need to put our preconceived notions aside and just think logically for a second. If our economy were really recovering, there would be no reason for the government to ratchet up spending, extend unemployment benefits over and over again, provide endless support to housing, and manipulate the bond market. The fact remains that the government is doing all of these things in an unprecedented fashion, and there are still no jobs. It's time to wake up to reality folks.
The crisis of confidence that inevitably follows prolonged periods of economic weakness is coming. The gold and bond markets are telling you everything you need to know.
This post has been republished from Moses Kim's blog, Expected Returns.