The U.S. Economy and Sources of Personal Income: A ‘V-shape’ with another ‘V-shape’

By M. Ulric Killion

[Graph Source: (In illustration of a typical V-shape, “The Recession of 1953 in the United States is a classic V-shape.Percent Change From Preceding Period in Real Gross Domestic Product (annualized; seasonally adjusted);  Average GDP growth 1947–2009,” Source: Bureau of Economic Analysis); Wikipedia.].

Today, I was reading an interesting short article that addresses “recession within recession,” or arguably, a V-shape with another a V-shape. It was interesting because it seemed a unique perception on the U.S. economy and its economic growth, or according to some, especially the Republic (GOP) forerunners, American woes. The short article, however, actually addressed the sources of personal income (i.e., private wages and salaries) when mentioning the V-shape.

The author of this short writing (or blog posting) is Karl Smith, and the article is titled, “Where Personal Income Comes From,” which is from the blog (or web log) of Modeled Behavior – A Stylized Foray Into the World of Highly Fashionable Ideas. I have personally subscribed to their blog postings for some time now, and even on occasion, as in my earlier posting of the blog posting entitled, China’s economic growth model – A recipe for growing too fast?, finding myself responding to one of their short articles.

For those unfamiliar with their blog, Modeling Behavior, if I had to describe it, I would say that their short articles are timely, intellectually stimulating, and insightful. In other words, for the curious of mind, especially about the workings and state of the U.S. economy, it is an excellent source of information, if not simply a reading source of excellent economic writings and thoughts.

However, and getting more to the point, in the way of background information, for those who are unfamiliar with the V-shape, it generally employs to describe the state of the economy and recession. In this case, it is being used to address the state of the U.S. economy as pertains to the sources of personal income.

In terms of assessing economic recovery, economists actually generally employ what characterizes a U-shape, V-shape, and W-shape. In other words, on-going economic recovery could characterize a U-shaped economic recovery, V-shaped economic recovery or W-shaped economic recovery, or, alternatively, a U-shaped recession, V-shaped recession, or W-shaped recession.

In a brief explanation of the significance of the U, V, and W shapes, they generally describe the following conditions of recession and/or recovery. First, the U-shaped recovery generally indicates a sharp downturn that precedes a slow and gradual recovery. Second, the V-shaped recovery indicates a sharp upswing, like the U-shape, but distinguishably follows a dramatic tumble or steep downturn in the economy. Third, and finally, there is the W-shape, which is distinguishable because it dramatizes the economy falling back into a recession before actually stimulating growth; in other words, what they call a “double-dip” recovery, or a recovery that is cut short by recession, and then a second rebound.

With that being said, an excerpt from the short article, which I find interesting, follows.

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“Where Personal Income Comes From”

March 5th, 2012 in Economics | by Karl Smith

A little breakdown on Personal Income growth.

The top redline is our primary line of interest. This is wage and salary disbursements of private industries.

As we can see they are now growing smartly and indeed are well above their pre-recession peak, 5670B vs. 5484B for growth of 186B

Small business income in blue, completed most of its bounce back about 18 months ago – somewhat startling to me it was the first to recover.

However, growth since then has been slow, though growth before the recession was slow as well. The peak month for small business income was December 2006. This is likely because so many small businesses are construction firms. I have looked at the breakdown but I am guessing small business income is split between restaurants and contractors. If that’s true it would be consistent with the notion that resterauntuers are doing well but the contractors haven’t recovered from the bust in 2005.

The light green line is government transfers. This is providing the strongest contraction. . . .

Interestingly though, if you look at the post Lehman drop-off that began in October of 2008 and lasted until March of 2009, that was most of the lost in private wages. It took roughly 2 years and 4 months to make back that decline. That’s roughly the exact same time frame as the 2000 recession despite radically different shapes.

It looks like the “recession within a recession” was actually fairly V-shaped in terms of private wages and salaries.

>>Read the full Article here: Where Personal Income Comes From « Modeled Behavior

All Rights Reserved by M. Ulric Killion, 2012.