Furthermore, the Atlanta Fed's macroblog as well looked into the relationship between the health of small businesses and the outlook for job growth in a post published yesterday evening (Prospects for a small business-fueled employment recovery): "During periods when national employment levels were expanding since 1992 (when this data series began), firms with less than 50 employees have made up approximately one-third of the nation's employment growth. During the employment declines associated with the 2001 recession, these firms made up only 9 percent of job losses. In the current recession, though, these very small firms have made up 45 percent of the nation's job losses. Looking ahead, it's not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery. However, if the above-mentioned financial constraints are a major contributor to the disproportionately large employment contractions for very small firms, then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries."
The chart below is also taken from this blog and highlights the job gains/losses by firm size.
Again to repeat: I think small businesses will continue to face a difficult financing environment which will render it more challenging to grow operations and furthermore limits business start-ups. This in turn hinders job growth to a significant degree, reduces the flexibility of the US economy and negatively impacts trend growth.
B) The evolution of personal income looks worrisome: Over the past months I highlighted several times my index of weekly nominal earnings (see for example Consumer deleveraging spiral still getting worse). This is derived from multiplying average hourly earnings with the index of aggregate weekly hours worked. Because these data are published with the monthly payroll report, they are the most timely indicator of the development of personal finances. Given that the growth in hourly earnings has been declining (+2.5% yoy in September vs. +4% yoy in December 2008) while unemployment and underemployment has been rising sharply, nominal weekly earnings growth has collapsed at an unprecedented speed (see chart).
Nominal weekly earnings are collapsing at an unprecedented speed
Now for the outlook for consumption growth, one key determinant usually mentioned is the development of disposable personal income (besides the savings ratio). Personal income constitutes of the compensation of employees (accounting for roughly two-thirds of income), proprietors income, receipts on assets as well as transfer payments. Deduct tax payments from personal income and you get disposable personal income. Unfortunately as shown above wage income is dropping significantly. Furthermore, also proprietors income has been falling as have receipts on assets (interest and dividend income). This leaves a poor development of disposable income less transfer receipts (see chart below, yoy %-change).
Also disposable income less transfer receipts is falling at an unprecedent post WWII speed
This leaves alll the heavy lifting for the government and the increase in transfer payments as well as the reduction in taxes are the only reasons why disposable personal income so far has not fallen more.
yoy% change in disposable personal income has been supported by government support
The rebalancing of the real economy has only just begun and promises to be a multi-year affair which will keep real growth rates subdued and inflation pressures in check. In turn, nominal growth as the key determinant for nominal bond yields should remain at low levels for an extended period of time!