One of the topics discussed at the UALR Arkansas Economic Forecast Conference last week was the importance of government transfer payments for assessing personal income growth at this stage in the business cycle.
During a recession, transfer payments tend to increase for two reasons: First, payments associated with economic hardship increase directly in response to the downturn in the economy. For example, unemployment insurance payments and other income support payments rise as displaced workers become eligible. This is sometimes referred to as part of the “automatic stablizer” mechanisms of fiscal policy. In addition, the government typically adopts special measures to boost aggregate demand during recessions. In this recession, the main vehicle for this type of support has been the American Recovery and Reinvestment Act (ARRA) — sometimes referred to as the “Obama stimulus” program.
Figure 1 compares data on total personal income (including transfer payments) for Arkansas and the U.S., using indexes based on the second quarter of 2008 (when both series reached their cyclical peaks).

Sources: Bureau of Economic Analysis, Institute for Economic Advancement.
Personal income in both Arkansas and the U.S. declined modestly over the two quarters following the peak. U.S. income took another sharp downward turn in the first quarter of 2009, before beginning a period of uneven recovery. In Arkansas, income stabilized in the first quarter of 2009, and was basically flat until the end of the year. This comparison suggests that income in Arkansas suffered a more modest downturn than the rest of the country, and has been recovering along with the rest of the nation since the fourth quarter of 2009.
But because transfer payments tend to rise during recessions, “Personal Income less Transfer Receipts” is considered to be a better measure of the economy’s underlying strength.1 Indeed, this is the measure of income monitored by the Business Cycle Dating Committee — the official arbiters of business cycles turning points. Figure 2 compares Arkansas to the U.S. using this measure of income.

Sources: Bureau of Economic Analysis, Institute for Economic Advancement.
Excluding transfer payments, the peak in income took place in the third quarter of 2008, instead of the second quarter.2 The U.S. still shows a sharper decline than Arkansas in the first quarter of 2009, but income in Arkansas began to recover by the second quarter of 2009–one quarter earlier than the U.S.
Figure 3 illustrates how non-transfer income and transfer income contributed to changes in Arkansas personal income in 2009 and 2010. It also shows the specific contribution of ARRA transfer income to the total.3

Source: Bureau of Economic Analysis
The increase in transfer income during the recession clearly helped to smooth total personal income in Arkansas. This is particularly evident for ARRA-related transfers, even though they constituted a small fraction of the total (averaging 0.9 percent from 2009Q2 through 2010Q2). Figure 3 also shows how income from transfer payments tended to mask the underlying turning point in non-transfer income in 2009Q2.
To show the relative magnitude of recent changes in transfer and non-transfer income, Figure 4 presents personal current transfer receipts as a share of total personal income. This measure rose sharply during the recession, and has continued to increase during the economic recovery.

Source: Bureau of Economic Analysis
For the U.S., transfers rose from 14.5 percent of personal income in 2007Q4 to 18.3 percent in 2010Q2. Over the same period, transfer payments in Arkansas rose from 19.7 percent to 24.5 percent of total income. Transfers associated with ARRA accounted for less than one percent of these increases.
Rising transfer reciepts have supported personal incomes during the recession and early stages of the recovery, but their contributions to growth are temporary. Transfer receipts contribute positively to income growth when they are increasing, but looking forward as unemployment declines and ARRA programs reach their completion, declining transfer reciepts will produce a drag on total personal income growth.
The table below illustrates this point, decomposing quarter-to-quarter growth rates of personal income into non-transfer income, transfers less ARRA, and ARRA components.

Sources: Bureau of Economic Analysis and author's calculations.
On a quarter-to-quarter basis, ARRA-related transfer receipts contributed significantly to income growth only in the second quarter of 2009, when the programs initially ramped-up. Quarterly ups-and-downs in ARRA transfers since then have contributed little to total personal income growth. Non-ARRA transfer receipts have risen in each quarter, but the “automatic stabilizer” mechanism that drives these increases will dissipate as unemployment gradually declines.
In the forecasts for 2011 and 2012, persistently high unemployment is expected to keep transfer payments growing slightly, but contributing little to total personal income growth in Arkansas: For 2011, growth in transfers contribute 0.8 percentage points to the total personal income growth forecast of 4.1 percent (Q4/Q4 growth). In 2012, the contribution is only 0.4 percentage points to the 6.0 percent forecast for total personal income growth. Transfer payments should begin to decline as a proportion of total personal income during 2012, and are expected to decline in absolute terms after that.
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Notes:
1 Personal Current Transfer Receipts include social security payments and veterans benefits, as well as unemployment insurance benefits and other general assistance programs.
2 The prior peak in Arkansas personal income, in 2007Q4, reflects payments associated with the buyout of Alltel–a one-time special factor.
3 ARRA data are from a special BEA report: Net Effect of ARRA on Personal Current Transfer Receipts. Links to additional information from the BEA Survey of Current Business are available here.