Americans are enduring the sharpest decline in their private-sector income in at least 50 years and their longest period of income stagnation since the nation's bicentennial in 1976.
The good news is that the decline may have ended in June and begun to rebound in July, according to a Commerce Department report released Friday. If so, that would be a strong signal that the recession is officially ending. The bad news is that it won't feel like a recovery until Americans' income recovers fully.
And that appears to be many months away.
The income number – officially known as real personal income (excluding current transfer receipts) – is important. It adjusts for inflation and strips out most federal stimulus money and other government payments like Medicare and Social Security that would distort what's happening in the private sector.
It's also one of the key measures that a special committee of economists looks at to determine when recessions begin and end. In the last five downturns, the peaks and valleys of real personal income and the economic cycle have always occurred within two months of each other.
Since hitting its current peak in September 2007, three(!) months before the recession, the income measure has fallen from $9.7 trillion to $9.0 trillion. That 7 percent drop is the biggest decline in the 50 years that the federal government has been keeping monthly records. Personal income hit its low point in June and began a very slight rebound (0.04 percent) in July, according to Friday's government report. Of course, the figures can be revised – or dip further – in the coming months, so it's dicey to call it a sustainable rebound yet.
More important for Americans is what will happen to their incomes. Past downturns offer some clues. The 7 percent decline is far worse than in the back-to-back recessions of the 1980s, when real personal income fell 2.6 percent and recovered in 11 months. It more closely patterns what happened during the stagflation of the mid-1970s, when the first Arab oil embargo helped set off high inflation and recession at the same time. Income fell 5.4 percent and it took 30 months for it to surpass its prerecession peak.
This time, we're at 22 months and counting.
If the pattern of the '70s and '80s holds, the recovery of Americans' private sector income will be slightly faster than its decline. But it typically comes months after a recession is over. The steep recession of the mid-'70s ended in March 1975, but real personal income didn't reach its precession peak until May of the following year. In the second 1980s recession, the slump was over in November 1982 but income didn't recover consistently until the following March.
So this time, unless the private sector rebounds unexpectedly quickly, it will be many months before Americans feel they have put this recession behind them.
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