by Steven Hansen

It seems most focus on money flows as the gauge of economic activity.  Non-monetary measures are generally ignored.  GDP measures money flows.

Consider that the majority of people (aka “consumers”)  in the USA (and the world for that matter) account for a small portion of the money movements.  Looking at incomes (and not expenditures), the reality comes into focus.

The above graph shows the breakdown of the economy by income – not selected expenditure like GDP.  The sum of this income pie is several times GDP as money moves around the economy.  The relationship between the incomes of people, business and government (as shown on the above pie chart) has remained fairly constant since 1948.

What has changed is the income distribution of people (totaling 43% of total USA income) in the yellow and green pie slices.  The yellow pie slice of Joe Sixpack has been getting smaller while the green pie slice for the richer Americans has been getting larger.

Average income becomes larger than median income as the number of high earners increases.

When we use money flows as a metric to understand how well an economy is doing, the majority of the population (the yellow pie slice) becomes insignificant. Joe Sixpack does not have enough money to be a factor in this economy where money flows are the squeaky wheel which gets the grease.  As the economic controllers are graded by how much money flows grow, natural gravity (not conspiracy or lobbyists) would cause laws and regulations to favor groups (business and high worth people) which will make the “money flow” economy expand.

In the case of the USA, 80% of the people amount to 40% of personal income, while 20% of the people make 60% of personal income.  This fixation on money movements as a metric to understand economic growth favors the elements of the economy which most easily can generate faster monetary expansion.

You remember the saying “It takes money to make money”.

For the richest people of the economy, this has translated into long  term wealth building (chart complements of Wikipedia).

If economic progress was based on counting jobs, or living conditions, or life expectancy – attention would be directed towards that metric instead of GDP which has little in common with Joe Sixpack, or the majority of Americans.  The GDP metric is now discriminating against Joe Sixpack.

GDP in chained dollars keeps rising.  Joe is getting further behind.

Economic News this Week:

Econintersect economic forecast for January 2010 pointing to a slightly improving economy.   This week the Weekly Leading Index (WLI) from ECRI continued to improve from 3.4 to 3.7 implying the business conditions six months from now might be improving.  Six monts ago, the WLI was declining indicating that December should have been slightly worse then July 2010.  This December data is coming in fairly strong.

Initial unemployment claims in this week’s release increased slightly.  If you look at the not seasonally adjusted claims – they rose to an eye popping 770,413. 

Here is a comparison to prior years non-seasonally adjusted initial claims with the approximate gain over the previous week:

2005  693,776 (+153K)

2006  555,114 (+80K)

2007  506,709 (+0K)

2008  547,943 (+25K)

2009  956,791 (+225K)

2010  815,593 (+170K)

2011  770,413 (+192K)

It is likely that the seasonal adjustment factors are a little off this week, and is one more reason to follow the four week moving average with smooths out the inconsistencies in the data.  The unadjusted increase for the first week of the year in 2011 is similar to the two preceeding years (2009 and 2010).  All three are obviously much larger than the preceeding three years (2006,2007 and 2008).  One is tempted to ascribe this difference to the institution of a New Normal.  However, 2005 (153,000) is close to the range observed for 2009-2011 so maybe the distribution of data 2006-2011 is a circumstantial arrangement of random data.

Moral:  Exercize caution when casually attributing observations to a “New” Normal.

Most of the data released this week was inconsistent with Econintersect’s December forecast of slow growth – and it more resembles Econintersect’s January forecast.  Overall the December data released this week was strong.  However, the transport indicators began their improvement in December which historically foretells economic improvement.   Warning: one month does not make a trend.  The table below itemizes the major events and analysis this week.

Weekly Economic Release Scorecard:

Bankruptcy this week: Constar International Inc.

Bank Failures this Week:

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