Full text of Business Trends : The Income Trend

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Prepared by the Research Department of the

FEUERf\1 RESERVE BANK OF CLEVELAND
Serving the Fourth Federal Reserve District

THE -INCOME TREND
The total of all money incomes received by
individuals in the United States is still at a
remarkably high level judged by almost any
standard, but the volume of this income total
is definitely diminishing. Both facts are important
for any appraisal of current and prospective
business trends.
We are talking ·here of total "personal income,"
which includes among other items wages and
salaries received by individuals, as well as profits
of business men, professional people and farmers
who work on their own. This total of personal
income does not include profits which go to corporations as such, but it does include dividends
and interest which are drawn from corporations
by private individuals, as well as interest received by people from the government, and insurance payments. The grand total makes up
the pool of personal buying power which Americans can use to buy goods and services, and to
pay taxes. Wages and salaries are the largest part
of this total.
Personal income was rising during last year
as a whole, but has been falling so far this year.
The most recent figures are for April of this
year, when total personal income as computed by

the U. S. Department of Commerce was a little
more than 3 percent below the all-time peak
reached last December (allowing for seasonal
variations) but was still 2½ percent higher than
in April a year ago.
Judging by what is now known about employment and production trends in May, it seems
probable that the May figures on personal income, as soon as they are announced, will show
a decline for the fifth consecutive month, and
will place the level somewhere about 4 percent
under last December's peak, allowing for seasonal variations. This decline, as well as the decline in th_e wages-and-salaries part of total income, is about half to two-thirds as steep as the
drop which took place during the first five months
of the 1937-38 recession.
The fall in total personal income so far this
year has been less severe than that of industrial
production, where the seasonally adjusted index
has probably declined at least 10 percent between
December and May. This fact may appear surprising at first, since the income figures reflect
changes in production and in prices, both of
which have been declinipg this year. However,
within short periods of time, income totals usual-

Broadcast by Addison T. Cutler, Trade Economist, Federal Reserve Bank of Cleveland, over WGAR,
Cleveland, with Jim Martin, Morning News Editor, WGAR, Saturday, June 25, at 9:15 a.m,.


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Federal Reserve Bank of St. Louis

some of whom are waiting for lower prices, and
some of whom are just cautious or nervous.

ly change more moderately than measures of industrial production, since income totals are more
comprehensive in scope and reflect a number of
elements in the economy which shift less rapidly
than industrial production. Thus, from the middle
of 1937 to the middle of 1938, industrial production dropped 33 % while total personal income
fell only 12%.

But the theory that the present high level of
total income is a bulwark against recession is
less tenable now than it was a year or two ago,
when the strong trend of national income could
be relied upon pretty well to overcome any
sporadic dip in the monthly showing of retail
sales, or in some other indicator of business
activity which showed a momentary faltering.
The change in the situation has come about because the total of personal income has declined
for a sufficient number of months to establish a
new direction. The change also lies in the fact
that this downward movement, although slight
so far, is part and parcel of a cumulative process
which is characteristic of the secondary phases
of any general business downturn, just as cumulation occurs in the opposite way on the upgrade
of business.

During most periods of business recession in
the past, total income has probably changed less
sharply than industrial production, although the
contrast has not always been as great as it was
in 1937 to 1938. On the other hand, over longer
periods of time, especially during protracted periods of inflation, the income total has frequently
changed more radically than has production. For
example, total personal income at its recent peak
in December of last year was more than three
times as high as its prewar level as measured by
the average of the years 1935 to 1939, while industrial production, measured in physical volume,
was slightly less than twice as high as in the
immediate prewar years.
While total income data are not computed
regularly on a local or regional basis, it is possible to get at least part of the picture for the
city of Cleveland, in comparison with national
trends, by looking at figures on manufacturing
payrolls. Thus, factory payrolls in Cleveland
dropped about 13 percent between December and
April, while the United States average was dropping only about 10 percent. The peak in factory
payrolls in Cleveland was in October and November, and the drop from that point to April
has been as much as 17 %. (These figures do not
make allowance for seasonal changes.)
Some observers have said recently that the
still high level of total personal income means
that business could easilY' be a lot better than
it is now. Sometimes they state it this way: the
fact that personal income is actually higher than
a year ago and has not declined very much from
the peak reached last December means that no
serious recession in business is likely to develop
in the immediate future. The argument has some
partial truth in it, because current levels of income would indeed permit more buying than is
actually being done right now by consumers,

Thus there comes a time on the industrial
front when a slackening of demand which has
hit one industry gets transmitted to the industries selling supplies or materials to the first
one. In a similar way, a declining trend in income makes for a reduction in consumer purchases and, until the process is checked, this leads
to reduced activity and to some increase in unemployment, followed again by a reduction in
income totals. There seems to be growing evidence that we are at the moment in this secondary
or cumulative phase of a recession period.
.

As has been pointed out in more detail in previous broadcasts of this series, there are a number of important factors in the present situation
which may be expected to limit the extent of
the business drop and, in the course of time, to
bring an upturn in total incomes as well as in
the tempo of business. Some of these favorable
underlying forces are inherent in the structure
of the economy and have always been there.
Others are in the nature of safeguards which
have been built into the economic mechanism as
a result of experience gathered in earlier times
of downturn. Still others may be in the making
today. In view of the present momentum of the
downturn, however, the decline in income may
be expected to continue over the near term.

Additional copies ol "Business Trends'' are available upon request.

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