Written by Steven Hansen
This past week we analyzed the latest BEA release on personal income and expenditure. The bottom line was Joe’s income was up, his spending was down. Joe seems to be marginally hunkering down.
Most of us are Joe Sixpacks, but as all Joe’s are different – it is hard to pinpoint causation of why this happened. The graph below illustrates the relationship between income (DPI) and expenditures (PCE).
Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Expenditures (red line)
The above graph is indexed, and shows the growth rate between Joe’s income and expenditure have a very high correlation over the long run. The above graph also shows that the economy of the consumer has not stabilized since the Great Recession showing uneven income and expenditure growth.
Note: The normalization of both metrics to their January 2000 values allows us to see how each compares to that reference over time: sometimes one is higher vs. the reference month and sometimes the other. It does not reflect that the absolute values are bigger or smaller at different times – DPI is always larger than PCE (on average income is 7% higher than expenditure), as shown in the following ratio graph.
Seasonally Adjusted Spending Ratio to Income (a declining ratio means consumer is spending less of Income)
The consumer between mid 2010 through 2011 was continuing to spend more of his income (and therefore saving less) – but in 2012 this trend has reversed, and now the consumer is spending less of its income.
What we know based on the data is that consumers started spending less of their income beginning in December 2011. And, except for the growth spurt that ended in November 2011, Joe has not returned to his old pre-recession ways. However, after looking stronger than after the 2001 recession the ratio has fallen back to value similar to the first two years following the 2001 recession. The only problem with that is we are now three years after the 2007-09 recession.
My opinion is that this short term trend is being caused by Joes uncertainty of future economic conditions. It does not take much delay for decreased consumption to show detrimental economic effects since the consumer is between 2/3 and 3/4 of the economy (depending on what one thinks the economy is).
Joe is spending about 1% less of his income compared to six months ago. A 1% change in Joes buying habits can move GDP over 0.6%, and could begin a cascade into other portions of GDP.
Hopefully the misleading advertisements of the political candidates will add enough to the economy to overcome the effects of Joe’s uncertainty. On the other hand, this may be what is adding to the uncertainty.
Other Economic News this Week:
The Econintersect economic forecast for August 2012 shows continues to show moderate growth. Overall, trend lines seem to be stable even with the fireworks in Europe, and emotionally cannot help thinking this is the calm before the storm. There are no recession flags showing in any of the indicators Econintersect follows which have been shown to be economically intuitive. There is no whiff of recession in the hard data – even though certain surveys are at recession levels.
ECRI stated in September 2011 a recession was coming, and now says a recession is already underway. The size and depth is unknown. A positive result is this pronouncement has caused much debate in economic cyberspace.
The ECRI WLI index value remains in negative territory – but this week is again “less bad”. The index is indicating the economy six month from today will be slightly worse than it is today. As shown on the graph below, this is not the first time since the end of the Great Recession that the WLI has been in negative territory, however the improvement from the troughs has been growing less good.
Current ECRI WLI Growth Index
Initial unemployment claims increased from 353,000 (reported last week) to 365,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – declined from 367,250 (reported last week) to 365,500. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.
Weekly Initial Unemployment Claims – 4 Week Average – Seasonally Adjusted – 2010 (blue line), 2011 (red line), 2012 (green line)
Data released this week which contained economically intuitive components (forward looking) were
- Rail movements (where the economic intuitive components continue to be indicating a moderately expanding economy – however recent movements are showing an economy growing barely more than 1%)
All other data released this week does not have enough historical correlation to the economy to be considered intuitive, or is simply a coincident indicator to the economy.
Weekly Economic Release Scorecard:
BLS Jobs Situation in July 2012 Good and Better than Expected
“You didn’t build that”: A Fifth Similarity between Communism and Democracy
The Dow: 83 Years of Cycles
Is It Nightfall for Knight Capital?
Health Care Paradox: Red Tape, Lobbies, Political Posturing . . . and Sick People
July 2012 Withholding Taxes Suggest Huge Job Gains
NFIB Says Job Growth Plans Remain Flat in July 2012 for Small-Business Sector
Rail Week Ending 28July2012: No Growth Year-over-Year
Manufacturing Data Very Soft in June 2012
02August2012 Unemployment Claims Update: 4 Week Moving Average Improves Slightly
Says Job Cuts Decline Again in July 2012
Greece Cuts Away and Tries to Sell the Rest
August 2012 FOMC Meeting Statement: Slightly Stronger Weak Statement Implying QE
Conference Board Reports Help Wanted OnLine Contracts In July 2012
June 2012 Construction Continues to Show Private Sector Expansion
July 2012 ISM Manufacturing Survey Remains Terrible
July 2012 ADP Continues To Show Moderate Jobs Growth
August 2012 International Economic Trends: Further Evidence Europe Is In Recession
Where is the Main Street Candidate?
China: Manufacturing Slowdown Continues
CoreLogic Reports June 2012 Completed Foreclosures at 2007 Levels
Maybe Washington Inches Back from the Cliff, or Maybe Not
9.8 million Receive Social Security Disability Benefits at End of 2011
BLS Reports Civilian Compensation Costs Increased 1.7% YoY in June 2012
July 2012 Conference Board Consumer Confidence Improves Slightly
Chicago Purchasing Managers Report Small Gain in July 2012
Case-Shiller Home Price May 2012 Improves but Still Down YoY
June 2012 Real Personal Consumption Contracts
Average Gasoline Price Rises $0.016 Week Ending 30July2012
French Car Plan: Climate Madness and Market Folly
CAPE and Tobin Say SELL!! Bubbleomics Says BUY!!
France: Higher Subsidies for Electric and Hybrid Cars
Clovis People Maybe Not the Only Early North Americans
Texas Manufacturing Activity Slows in July 2012
Midwest Manufacturing Output Increased in June 2012
Economic Forecast August 2012: Marginally Declines but Still Good
Peak Oil: The Hidden Cost
Keynes: Speaking 80 Years into the Future
Insider Trading 27 July 2012: Bill Gates Unloads Over 4 Million Shares of Microsoft
Nothing has Changed for Greece
The Week Ahead: Expecting too Much from Central Bankers?
Austerity and Schadenfreude
Trefis: Review Week Ending 27 July 2012
Bankruptcies this Week: Digital Post Interactive, Neogenix Oncology, Curaxis Pharmaceuticals, The City of San Bernadino (California)