Strong Fundamentals?
(1) It took almost four years for real disposable income per
capita to return to its previous peak level of $36,679 (which it reached in Q2
2008). It continued to grow throughout
that year by the end of 2012 reaching a level that was just a hair over 3% more
than its level in 2008. This growth abruptly ended as the payroll tax reduction
was removed. This was part of the
agreement that President Obama and Congress reached to avoid the infamous
“fiscal cliff” in early 2013.
(2) A return to the Q2 2008 level of real disposable income
per capita took considerably less time the second time around. It returned to the level it was at six years
earlier during the first quarter of 2014.
Real disposable income per capita however only reached the point it had
achieved in late 2012 during the first quarter of 2015 (meaning at this time
last year). It has continued to grow
over the last year. However it is important to note that as of the end of 2015 real
disposable income per capita stands at $38,445 or $1,766 higher or 4.8% higher than
where it was seven and a half years earlier.
This represents about two-thirds of a percentage point annual growth in
the average American’s earnings after taxes since the Great Recession. Compare this to an annual average rate of
increase of 2% between the second quarter of 2001 and the second quarter of
2008!
(3) Despite poor growth in real disposable income consumer
spending has increased at a respectable clip.
If this growth cannot be attributed to growing earnings in general, then
the question that should be asked is what should we credit this growth to? There are potentially several things that
have fostered growth in consumer spending despite slow growth in real after tax
income per person. None of these are sustainable
over the longer term.
First, between 2007 and 2014 there have been about 9.4
million non-business bankruptcies. Rather
than lowering consumer spending, by wiping the slate clean, bankruptcies can
increase it.* In part because
of bankruptcies**, household debt per person in real terms has
fallen by over 12% and so what can be called discretionary real income has
risen accordingly at a much faster clip than real disposable income has. Falling levels of debt when combined with lower
interest rates have translated into a reduction in debt service equivalent to over
$900 per person or, with a population at the end of this last year of over 322
million by the end of 2015, an
additional $290 billion of spending power in real terms.
* If
one defines real discretionary income as real disposable income per family net
of payments of interest and principal on outstanding debt or as: C=
+ mpc(Y-T-(i+g)*D)
where g=the percent of principal amortized over the year , D is equal
to the real value of debt outstanding, and Y-T-(i+g)*D is equal to real discretionary income
or real disposable income after payment of interest and principal on debt. Given the mpc, a drop in D means that
household spending grows despite little growth in earnings. Of course, rising levels of debt service can
also fuel growing consumer spending.
However, in this case, it is only if real disposable income grows at a
faster clip. It is perhaps instructive
to compare the 2001 to 2008 period to what we have seen over the last seven
years since the Great Recession began.
Real disposable income per person grew by over 15% 2001 to 2008 while
real discretionary income grew by 14.81% with debt service per person
increasing by $713 in real terms. Real
disposable income per person grew by less than 7% 2008 to 2015 while real
discretionary income grew by a bit over 10% with debt service per person
falling $706 in real terms. Borrowing fuels growth and default and lower
interest rates (to the degree there is refinancing or variable rate debt) fuels
continued growth in consumer spending despite lower growth in real disposable
income. The former is much healthier obviously than the latter.
+ mpc(Y-T-(i+g)*D)
where g=the percent of principal amortized over the year , D is equal
to the real value of debt outstanding, and Y-T-(i+g)*D is equal to real discretionary income
or real disposable income after payment of interest and principal on debt. Given the mpc, a drop in D means that
household spending grows despite little growth in earnings. Of course, rising levels of debt service can
also fuel growing consumer spending.
However, in this case, it is only if real disposable income grows at a
faster clip. It is perhaps instructive
to compare the 2001 to 2008 period to what we have seen over the last seven
years since the Great Recession began.
Real disposable income per person grew by over 15% 2001 to 2008 while
real discretionary income grew by 14.81% with debt service per person
increasing by $713 in real terms. Real
disposable income per person grew by less than 7% 2008 to 2015 while real
discretionary income grew by a bit over 10% with debt service per person
falling $706 in real terms. Borrowing fuels growth and default and lower
interest rates (to the degree there is refinancing or variable rate debt) fuels
continued growth in consumer spending despite lower growth in real disposable
income. The former is much healthier obviously than the latter.
**Twelve states (most notably California) have no recourse
mortgages (1) where, when
a mortgagee goes into default, the creditor can only recover the sale value of
the property. A debt of $x thousands of
dollars is written off when the default occurs and the property is sold for X-Y
thousands of dollars. The amount y is
absorbed by the creditor. Even in states without such arrangements the benefits
of a strategic default have often been far higher than the costs. These defaults have freed up funds previously
used in servicing debt that then fuel higher consumer spending (2). Add to this the exemptions on chapter 7
bankruptcies where many assets are protected (car, home, and such) one can see
the boost to consumer spending afforded by no longer having to service as much
outstanding debt.
Secondly, after falling by less than a
percentage point 2008-2010, real income for the top 20% of all households in
the US grew in real terms by over 13% between 2008 and 2014. This translates into an increase in overall
inflation adjusted earnings of some $573 billion total or $23,000 per
family. This growth in earnings was 1.72
times faster than the middle fifth of the families and, even assuming a
tendency to spend out of income of only 0.5 for the top quintile would account
for about a third of the growth in consumer spending between 2008 and 2014. The
mean income of families in this top quintile in 2014 was $194,053 and the mean
for the fourth quintile was $87,834.
Assuming a tendency on the part of both groups of 50%, the growth in
earnings of the top 40 percent of the households in the US (far in excess of
the growth in earnings for the bottom 60%) would combined account for 44% of the
increase in consumer spending seen between 2008 and 2014. When assuming an mpc of .7 for families in
the fourth quintile the contribution of higher income Americans to the growth
in consumer spending rises from 44% to nearly half.
(4) This $290 billion gain in real
discretionary earnings when combined with the effect of disproportionately
faster growth in family incomes for the top 40% of American families in terms
of income accounts for almost 80% of the growth in real consumer spending per
capita since 2008.***
*** If you assume an mpc out of real discretionary income for
the falling debt service group of 0.9
(5) Gross private domestic investment spending
only returned to its peak level of 2773.83 billion (in the first quarter of
2006 or 10 years ago!) at the very end of 2014.
This of course then was just a little over a year ago. As of last quarter it is only 68.2
billion higher than it was at the very start of 2006 or just 2.4% higher. Technological advances come in the form of
new investment and increasing amounts of net investment increases the hourly
productivity of labor, even in the absence of technological change. The fact that investment spending has not
increased for over a decade is yet another source of concern.
(6) Employment hit its peak in the fourth
quarter of 2007 at 146,271,000 and failed to return to this level until the 3rd
quarter of 2014 (when it reached 146,479,000).
Now (as of the end of 2015) employment stands at 149,523,000. In short, within 8 years we have only seen
job growth of 3.25 million or 2.2% overall.
And while 22% of the jobs lost during the crisis were low wage jobs 44%
of the jobs created have been these sorts of jobs.3
(7) If government spending on goods and
services at all levels of government (local, state, and federal) were to return
to the level it was at per American and that we accepted as safe and prudent
during the last year of President George W Bush’s tenure in office it would be
over $300,000,000,000 higher than it is now (at the end of 2015). This
translates into nearly $200 billion higher spending at the state and local
level and over $100 billion at the federal level. Instead state governments throughout the U.S.
have continued to cut K-12 public school funding and spending on a variety of
other vital activities. The most
striking statistic that I can refer to as far as school funding is concerned is
that as the number of students enrolled in public schools K-12 has grown by
over 800,000 since 2008 the number of teachers employed in our public school
systems has fallen by almost 300,000.
The short-run impact of such job losses when combined with the
longer-term costs of a potentially even less well-educated labor force than we
have at present is very serious. Cuts to
not only education but to public health and infrastructural maintenance and
development acts as drag on effective demand in the short-run but also create
significant problems vis-à-vis our productive capacity over time.4
(8) While real GDP grew at an average
annual rate below 2% a year during the first ten years of this century and has,
2011-2015 grown at a slightly faster clip of over 2% a year. This, however, compares quite unfavorably to
the decade-by-decade rates of growth each decade from 1950 to 2000.
(9) The Fed’s efforts to stimulate the
U.S. economy have been out of sync with the ECB’s efforts, the Bank of Japan’s
efforts and so on. In part because of
this but regardless their efforts have been far more successful in stimulating
the financial sector than it has been providing stimulus to the overall
economy. The impatience many have had expressed
with the Fed, urging the FED to push interest rates closer to their “normal”
or, worse still, “natural” level by raising the targeted fed funds rate above
the 0 to .25% range to where it is now (in the .25% to .5% range) and beyond is
confusing inasmuch as Aaa and Baa bond yields have been rising over the last
year. The increase in Baa yields has
been more pronounced than the increase in Aaa yields increasing the spread
between the two.
(10) The only more or less consistently
positive factor in terms of effective demand has been real export spending. After falling dramatically in 2009 it
recovered quickly and continued to grow.
Real export spending is now 17.8% higher than it was in the second
quarter of 2008. However since the
second quarter of 2010 the rate of growth has slowed down. A very worrying sign is that there was
negative growth in the fourth quarter of last year.
So much for sound fundamentals.
