Businomics Blog

How Are Consumers Able to Keep Spending?

Yep, consumers continue not only to spend, but to increase their spending in most months. Here's the latest data:

Over the past 12 months, total consumer spending has increased 4.5 percent. I hear people say that consumers are maxed out on credit, no longer can dip into housing equity, and don't have jobs. So how can they spend?

Keep in mind, first of all, that our 9.1 percent unemployment rate works out to a 90.9 percent employment rate. Double check my math if you like.

The savings rate is 4.5 percent, much higher than at the peak of the boom, so consumers in the aggregate are not being hugely irresponsible (though most folks need a much higher savings rate to be financially secure in retirement).

How can people increase their spending by 4.5%?  Well, after-tax incomes are up 4.7 percent in the past 12 months.  Here’s how we reach that figure. First, employment has risen by one percent, with average hourly earnings up about two percent. So wage and salary earnings have increased three percent. The big key to the increase in take-home pay is the cut in Social Security taxes in January 2011, which reduced the employee’s tax rate from 6.2 percent to 4.2 percent. The tax cut was probably effective in boosting consumer spending.

What's the outlook? The President wants to extend the temporary Social Security tax cut. Most members of Congress will concur. With everyone agreeing, what are the odds that Congress will actually act? Not that great, but we'll see how the politics work out. I think that employment will gradually improve, with the emphasis on gradually.

Business Planning Economics: Don't write off consumers. The exuberance of the boom may be gone, but folks are still spending money, and will continue through 2012, barring a double-dip triggered by Europe's crisis. That's not my most likely outcome, but it's certainly possible.

An Optimistic Economic Scenario for Manufacturing and Industrial Distribution

It's hard to be optimistic about the economy, and my own economic forecast is fairly conservative. I look for optimists, but can't find any. The closest thing I've found is three contributors to The Wall Street Journal's survey who expect GDP growth of four percent or a little better. Given our current gap between actual and potential GDP of over eight percentage points, a four percent growth rate isn't much.

Even though I'm not optimistic, I think the economy does have upside potential. There's enough of a possibility of a stronger economy that companies should engage in economic contingency planning for such a scenario.

Here's how we tell an upside story for manufacturers and industrial distributors. Industrial production peaked in December 2007, and then in the recession dropped 17 percent. Since the bottom, production has recovered ten percentage points of the drop.

How do we get an optimistic story from this? We had decent growth of industrial production from June 2009 through June 2010. If we could return to the growth rate of that 12-month period, we'd blast through our old peak level of output in July 2012, less than a year from now. Businesses would find that they lacked capacity for all that activity, and they would order more equipment, computers and buildings. In fact, once we were on a trajectory to regain the old peak level of output, companies would anticipate capacity shortages and start buying new equipment. We don't even need 12 months of solid growth, just six months or so.

In the chart, the period of moderate growth comes right after the trough. I call this moderate growth rather than strong growth because the rate of gain is smaller in absolute value than the rate of decline during the recession. The future period is shown in red, and tracks exactly the month-to-month percent changes from the period of moderate growth.

OK, so we need six months of moderate growth, rather than the crummy growth we've actually been getting. What could trigger stronger growth? The best candidate is the rapid growth of the money supply that we've been getting.

The strong growth in industrial production began about seven months after the strong growth in the money supply that the Federal Reserve engineered during the financial crisis. Monetary policy normally works with a substantial time lag. We are now in another period of rapid money supply growth, which could well give us strong production growth in three to nine months. (As a number of commentators have said, some of the money supply growth may be hot funds leaving European banks for the safety of the United States. Some of it may also be U.S. corporate funds that would have been swept into other overnight non-bank assets, but are not now due to regulatory changes allowing payment of interest on demand deposits. I have not heard a credible estimate of the magnitude of this effect.)

I'm not at all convinced that the optimistic scenario I've sketched out will come to be, but I am absolutely convinced that it's possible and warrants some consideration in corporate planning discussions.

 

 

 

 

Economics Newsletter September 2011

A very good economics newsletter (if I do say so myself) was just released. On that link is an opportunity to subscribe for free via email.

Here's the front matter not included in the link:

What’s New, September 2011

What’s different about the newsletter this month? A free copy of the Businomics book to the first who can tell me. [Note: the free copy of Businomics has already been awarded.]

The President’s Jobs Plan stimulated a lot of media interest, including National Review, CNN/Money and the Financial Post. To see most of the quotes, hit my Press Coverage page.

The Blog now has 1000 posts! Here are some recent ones:

Economic Forecast: How Long Until We're Back to Normal?

Reasons for Optimism on the Economic Outlook: 2011 second half and 2012 first half

Can Industry Survive the Stock Market Crash?

Probability of Recession: Is It Really One in Three?

Using an Economic Forecast in the Corporate Planning and Strategy Retreat: A Great New Idea

Dave Spaulding had an idea so good that I wish I had thought of it myself. I was briefing the directors and senior executives of Red Canoe Credit Union at the beginning of their strategic planning retreat. It was a small enough group that I encouraged questions and comments throughout the presentation.  Dave, who is the CEO, popped in periodically relating my economics to the key strategic issues that would be discussed later in the meeting.

For instance, as I was talking about how monetary policy and the economy were affecting credit union deposits and loans, Dave mentioned that the credit union had some big decisions to make about how much to spend to attract new members. As I was discussing changes in population growth, Dave told his directors they would be talking about strategies for new branches, which ties into local population growth.

From here on out, I will share my outline with the CEOs whose organizations I brief, and encourage them to relate the economics to upcoming strategic decisions. Economics is a building block for decision-making, so smart CEOs will help their directors make the connection between economics and strategy.

Obama Jobs Plan--Ahead of the Speech

The President's jobs speech (9/8/2011) has triggered a good bit of coverage, including CNN/Money, the Financial Post (Toronto), the Statesman Journal (Salem, OR) and Oregon Business Report.

Here's the nutshell from those stories:

When my wife was having kids, it would take her nine months to get really swelled up in the belly. She couldn't reasonably expect to get her figure back in month or two. She did her old figure back, but it took a while.

There is no magic bullet. Nobody can jump start the economy. For years consumers took on too much debt and homebuilders constructed to many houses, facilitated by misguided government policy and clueless investment banks and investors. We have not yet worked off the excess debt, nor the excess housing supply. The economy won't get back to normal until that's done.

Benjamin Franklin on Economic Disasterists

I was reading the Declaration of Independents, a really fun read, and they mentioned the autobiography of Benjamin Franklin. I had not read it, but thought maybe I should be familar with it, so I went to the computer and learned that it was available as a free download for Kindle. Sixty second later I had my own copy of Franklin's autobiography, for free, and I reflected on how GDP was not increased, even though my own satisfaction was well increased.

The book is engaging. Here's a great and very relevant passage:

There are croakers in every country, always boding its ruin. Such a one then lived in Philadelphia; a person of note, an elderly man, with a wise look and a very grave manner of speaking; his name was Samuel Mickle. This gentleman, a stranger to me, stopt one day at my door, and asked me if I was the young man who had lately opened a new printing-house. Being answered in the affirmative, he said he was sorry for me, because it was an expensive undertaking, and the expense would be lost; for Philadelphia was a sinking place, the people already half-bankrupts, or near being so; all appearances to the contrary, such as new buildings and the rise of rents, being to his certain knowledge fallacious; for they were, in fact, among the things that would soon ruin us. And he gave me such a detail of misfortunes now existing, or that were soon to exist, that he left me half melancholy.

Had I known him before I engaged in this business, probably I never should have done it. This man continued to live in this decaying place, and to declaim in the same strain, refusing for many years to buy a house there, because all was going to destruction; and at last I had the pleasure of seeing him give five times as much for one as he might have bought it for when he first began his croaking.

Mr. Mickle's descendants continue to be as pessimisic as he. And people of Franklin's energy, honesty and intellect continue to be as successfu.

 

Economic Forecast: How Long Until We're Back to Normal?

This is an ugly calculation. My recently updated economic forecast through 2013 shows a wide gap between actual output and potential output. That is roughly equivalent to unemployment being above normal of five percent or so.

In the last year of my forecast horizon, 2013, I predict GDP growth of 3.5 percent. If that pace of growth continued year after year (which I am not actually forecasting), how long until we're back to normal? Actual GDP equal to potential GDP, and unemployment about five percent?

2020. That's not an eye exam result, it's the year we're back to normal if GDP does not accelerate beyond the rate of my 2013 forecast.

My best estimate? GDP growth will accelerate, especially once we work through the excess housing supply. So we should get to normal much sooner than 2020. However, it's well worth noting that current growth rates are dismal, even for relative optimists like me.