As Economy Stalls, Personal Income Takes a Hit

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After incremental gains earlier this year, Americans are seeing smaller earnings growth again, with rates receding to levels not seen since the second half of 2010.

Nationally, personal income growth slowed to 1.1 percent, on average, in the second quarter of 2011, down from 2.1 percent in the first quarter, according to estimates released Thursday by the Bureau of Economic Analysis (BEA).

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"This is like decelerating from 30 miles per hour to 15," says Richard Barrington, personal finance analyst at MoneyRates.com. "You weren't going that fast to begin with, but you'll feel it. It's yet another confirmation that things aren't going backwards yet, but they're slowing down."

Losses in personal income growth come as some economists fear the labor market could be weakening more than expected. Jobless claims fell slightly, to 423,000 this week, but were revised up for the previous week, along with the four-week moving average.

The slowdown could be catastrophic, according to some experts, who worry that simmering problems domestically could be brought to a head by the festering sovereign debt crisis and the banking crisis bubbling in Europe.

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"We are edging closer to another financial crisis, rooted in Europe," Mesirow Financial Chief Economist Diane Swonk wrote Thursday. "This could precipitate another recession, which would hit developed and developing economies alike."

Nebraska and South Dakota led the states in personal income growth in the second quarter, each posting 2.2 percent gains, while Washington state and Georgia brought up the rear, both reporting a mere 0.7 percent growth in personal income.

High global grain demand made the Plains region the fastest growing of the eight BEA regions, where the value of crop output was 9 percent in Nebraska and as much as 8 percent in Kansas and Iowa. Rising energy prices also played a role in personal income upticks in North Dakota and Wyoming, where earnings in the mining industry—which includes oil and gas extraction—grew 14 percent and 7.3 percent, respectively.

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In the second quarter, a still-depreciating dollar helped durable goods exports, which grew almost 3 percent and made meaningful contributions to earnings growth in Oklahoma, Wisconsin, Iowa, Kansas, and Indiana.

Unemployment rates throughout the country also explain the variation in income growth, Barrington says. While South Dakota and Nebraska enjoy some of the lowest unemployment rates in the country—4.7 and 4.2 percent, respectively—Washington and Georgia struggle with rates higher than the national average (9.3 and 10.2 percent, respectively).

"What you're seeing here is supply and demand," Barrington says. "When there's a shortage of workers, wages go up. It's striking how different it is from state to state."

But while Nebraska and South Dakota offer a couple of bright spots amid a seemingly never-ending parade of grim economic news, the deceleration in personal income in the second quarter could be the prologue to more cutbacks, Barrington cautions.

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"This data is talking about the second quarter before the whole debt ceiling debacle scared the pants off of everyone," he says. "Even before that, this shows that businesses were cautious. [The debt ceiling debacle] really put businesses and consumers in a defensive mode."

The aftereffects of that severe blow to consumer and business confidence has yet to work its way into economic data, Barrington says, and "it would not be a shocker if things got worse," he adds.

Consumer confidence and spending have already suffered due to the uncertainty surrounding politics and the economy here and abroad, and another bite out of Americans' personal income will likely exacerbate that.

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"You're seeing a deceleration of income growth, and that diminishes your expectations for the future," Barrington says. "If you see your income growing at a healthy clip, you're more likely to make extra purchases, but if your raises are meager and long-in-coming, you're not going to feel that optimistic."

mhandley@usnews.com