Effects of the Economic Slowdown on U.S. Personal Income

The first quarter of 2007 was a high-growth quarter for personal income, in large part thanks to higher-than-normal bonus payouts. This points to high profitability in 2006, and a relatively stronger economy. In 2008, however, first-quarter income growth appears significantly slower than both yearly and first-quarter growth in 2007.

The housing market problems and abnormally high and rising oil prices are the most commonly understood causes of the current economic slowdown. Interestingly, however, the effect of the economic slowdown on personal income varies widely across the states. Looking at the personal income growth differential using growth rates in first-quarter 2008 and first-quarter 2007, we can see a loss of over 16 percentage points in Arkansas and a gain of more than 24 percentage points in North Dakota. This shows a range of more than 40 percentage points in the income growth differential across states.

Personal Income Growth Across States

(Percent changes, annual rates)

Source: Bureau of Economic Analysis

The financial sector crisis is the proximate cause of the deep slowdown in personal income growth in severely hit states such as Delaware, New York, and Connecticut. The biggest losers, however, are Arkansas and Louisiana, registering declines of 7.3% and 2.4% in personal income, respectively, during the first quarter of 2008. In the case of Arkansas, neither the financial sector nor oil prices are the major culprit. Instead, higher grain prices leading to higher feed costs has pulled down personal income in the livestock sector, and, even more crucially, the information sector saw a decline in personal income—this sector paid huge bonuses in the fourth quarter of 2007. Indeed, earnings in the information industry in Arkansas decreased by 46% in the first quarter of 2008, after increasing by 141% during the fourth quarter of 2007.

Katrina-based compensation has boosted personal income growth in Louisiana in the form of various transfers and insurance payments. Those payments are now dying down, and that has resulted in a decline in personal income in the state economy. Mississippi's personal income has declined for similar reasons. In Idaho, meanwhile, it is proprietors' income that has suffered the most. Lumber producers in Idaho lost a great deal of business due to a nationwide slowdown in construction activities, which shows up as a decrease in proprietors' income.

There are a few states that have appeared immune to the national recessionary tendencies. Notably, North Dakota recorded personal income growth of above 34% in the first quarter of 2008—more than 24 percentage points higher than its income growth in the first quarter of 2007. What is driving this kind of growth? The fact is that North Dakota is the flip side of the recession story. Higher prices for both oil and agricultural produce are benefiting the state economy, translating into an exceptionally strong growth in personal income. Agriculture is also the reason for high personal income growth in South Dakota. New Hampshire, however, has a different story. There, the first quarter of 2007 had abnormally low personal income growth due to enormous decreases in payroll in the financial sector, and the first quarter of 2008 displayed a significant contrast.