There were a number of special factors that boosted real income in the first half of the year, helping to offset a sharp drop in hours worked and very sluggish hourly wage gains. These factors included the sharp drop in gasoline and natural gas prices; the large cost-of-living-allowance increase for Social Security recipients reflecting last year’s high headline inflation; a sharp drop in final tax settlements; a reduction in withholding tax rates; and a one-time payment to Social Security recipients. These factors provided a transitory boost to real incomes, which will be absent during the second half of the year. As a result, real disposable income is likely to decline modestly over this period. Second, households are still adjusting to the sharp drop in net worth caused by the persistent decline in home prices and last year’s fall in equity prices. This suggests that the desired saving rate will not decline sharply. That means consumer spending is unlikely to rise much faster than income. In other words, weak income growth will be an effective constraint on the pace of consumer spending. BIS Review 94/2009  1  Moreover, some sectors such as business fixed investment in structures are likely to continue to weaken as existing projects are completed. In an environment in which vacancy rates are high and climbing, prices are falling, and credit for new projects is virtually nonexistent, this sector is likely to be a significant drag on the economy over the next year.
And at this point, I would like to stress more on why we cannot afford to be complacent with the situation. Most importantly, there always seems to be an unbridgeable gap between what market anticipates and what governments and central banks can really offer at the end of the day. And if history is any guide, it is precisely this gap that creates ripples of disappointment and risk aversion that propagate throughout the global financial market almost instantly. When we look back, not so far in the past, all of us have just witnessed a panic sell-off in global stock markets starting from late July to September. In addition to stocks, almost every type of risky assets was also under tremendous selling pressure across the board, and some  2  BIS central bankers’ speeches  market commentators even went so far as comparing this event with the onset of the 2008 global financial crisis. And when we look forward, the future is not very promising either due to two major reasons. First is the fact that so-called “milestone” developments toward the resolution of the crises in the U.S. and the Eurozone so far do not seem to address problems at their root causes; rather, issues have been dealt with merely temporarily, one after another. A recent example of this would be the eleventh-hour negotiation in the U.S. in raising debt ceiling limits only to meet the August-second deadline, which did nothing but leave the big elephant standing in the room.