Bill Cara: Incomes and savings, inflation and spending, Wed., Mar. 1, 2006, 9:45 AM

« Trading in Tokyo is quite erratic, Wed., Mar. 1, 2006, 8:37 AM | Main | Reporting or cheerleading?, Wed., Mar. 1, 2006, 10:09 AM »

March 1, 2006

Incomes and savings, inflation and spending, Wed., Mar. 1, 2006, 9:45 AM

The U.S. Commerce Department has published data this morning that like the housing data earlier this week is reflecting the growing likelihood of an economic slowdown this year.

MarketWatch reported (see Econoday report below):

(1) Real disposable incomes - after inflation and after taxes - increased 0.1 pct in January, the weakest gain since August. Real disposable incomes are up 2.2 pct in the past 12 months.

(2) Real consumer spending - adjusted for inflation - increased 0.4 pct in January, the weakest since October.

(3) In nominal terms -- that is, not adjusted for price changes -- consumer spending rose 0.9 pct, the biggest gain since July.

(4) The personal savings rate fell to negative 0.7 pct, the lowest since August. Savings have been negative for eight of the past 10 months.

College Econ 101 can be lots of fun if you don't over-think it.

Here's the situation in a nutshell:

People are unhappy with the U.S. Administration because they are being lied to when all they want and expect are the straight facts. The data shows that "real disposable income" is up +2.2 pct this past year. The word "real" means inflation-adjusted. The public are being told that "core" inflation is just +1.8 pct Y/Y. "Core" does not include food, energy or a host of other real world costs of living.

So if the total inflation rate is growing, according to government data, at +4.0 pct Y/Y, and real disposable income is +2.2 pct, then that would mean that gross personal incomes would have to be up +6.2 pct Y/Y.

Maybe they are in New Canaan CT, home of many of America's largest corporation CEO's, but they are not (I repeat not) rising at +6.2 pct Y/Y in America's heartland.

Now, the public is not stupid; they know that in fact the cost of living is rising faster than +1.8 pct or +4.0 pct Y/Y. They know that because they have to look at their Cable TV bill, their kids' education costs, their medical, dental and insurance bills, their property taxes and hydro bills, and all the other "real" line items in their monthly bill-paying exercise.

And so they are dipping into their life savings in order to maintain a lifestyle to which they have been accustomed, and are working so hard to achieve; that is, if they have not lost their factory job (see ISM data below), etc.

Meanwhile the Administration is telling them that the economy is just fine thanks, and oh we need another $100 billion for this and $100 billion for that; Iraq, Afghanistan, Katrina, etc; and they start to put two and two together. They see that every $100 billion works out to $300 for every man, woman and child, including inmates, hospitalized, incapacitated, (etc), person in America.

But they know their family income is under $100,000. So they say, "What the (expletive deleted) is going on here?"

I ask myself the same question.

Is it any wonder why stock market touts and talking heads continually refer to a "Wall of Worry"?

p.s., my calculator did not say "tilt". I corrected the $330,000 figure. At least now you know (i) I do my own work, and (ii) I have no editor. :-)

Posted by Posted by Bill Cara on March 1, 2006 09:45:29 AM | Category: Economics

Discourse

Bill-

Let's see the spin on this. I am looking for interday reversal to push this lower. Yesterday I made money on my portfolio.

Posted by: MarkM at March 1, 2006 10:02 AM [link]

Bill, I am getting a figure of around $335 per capita per $100B spending. One of us has a few zeros off:
$100,000,000,000 / 298,211,175

population figure from:
http://www.census.gov/main/www/popclock.html

Posted by: josh at March 1, 2006 10:17 AM [link]

I think the $335 per capita figure is the right one. However, the larger point stands: total "exposures" (a figure that includes medicare and social security obligations) amounted at YE2004 to about $43T according to recent GAO Report on Fiscal Outlook (called "A Look at Our Future" sorry I don't have a link). Same report gives following figures for "exposures" per person of $147K, per full time worker of $350k, per household of $383k. The report compares those figures to median household income of $44k and disposable personal income per capita of $29k.

Posted by: elisa at March 1, 2006 10:58 AM [link]

I don't have a problem with the term,"core", but the term, "cost of living", is an oxymoron. "Living" requires food and shelter - neither of which is included in the COL.

Bill, I don't know if you recall the 1967-70's in the US, but I do. It was tough times. War-anger, jobs-slowing down, summer heat, and frustrations of poor culminated in an unhappy community - meaning riots and burning in the streets across the land.

Historical Gold data for that time is not valid in the US but maybe Canadian data is better? Might be that I am just out in left field on this, but I don't have a good feeling about where we are headed.

Posted by: spot at March 1, 2006 11:02 AM [link]

BTW, MarkM, you did good!

Posted by: spot at March 1, 2006 11:04 AM [link]

spot-

It's my Tortoise Portfolio. It creeps along while the market zooms up. It pauses and rests when the market moves back. It's been working for the past month or so after I put it together and , most importantly, I can sleep at night.

Long: GLD, treasuries and everything else hedged to the hilt.

Posted by: MarkM at March 1, 2006 11:30 AM [link]

spot, you asked about my recollection of the 1967-70 period in America. Well, I wasn't at Kent State (other than via TV). But I was driving the streets of Miami in 1967 -- at least those that had not been barricaded or bombed.

There was, at the end of the Vietnam War, a lot of social discontent which I don't see at all today -- probably because of 9/11.

But today, the public is better informed because of the Web. It seems everybody is a private investigator, which is not a bad thing because, as I see it, the job of Big Media seems to have switched to being one of entertainment. We now have access to more information, faster, and we are not so happy with what we see.

So walls are being built and then torn down more quickly. "Hot" money is now even hotter. The usual controls by govt regulators are not as effective, so govt seems to be pulling out all the stops (including lying to the people in the interests of "national security") and they are failing because people are not that gullible. People are more skeptical, and society is unquestionably more stressed.

But that stress comes from a sense of being out of control, rather than oppressed or taken advantage of.

Therefore, I'm not so sure that this cycle is going to end with violence like happened in the 60's. Instead, I think society will use the tools and resources available to them to find their own solutions, and not rely on govt or Big Media or Wall Street as much.

I think the underground economy will grow faster, and there will be more "virtual" communities of interests (with their own centers of influence).

And I think we'll start to see more people like John McCain and Barack Obama come into politics, and fewer people like George Bush and John Kerry with their links to the ultra-wealthy.

If I am right about the future, I see the Mom & Pop owners of capital trading increasingly abroad -- not because the grass is greener but in order to spread risks. My only concern is that a dumb Congress would try to legislate currency controls to prevent or slow that process. And if they do, I think in that case it would lead to violent social upheaval.

Posted by: Bill Cara at March 1, 2006 12:28 PM [link]

Bill - I sincerely hope you are right. Those times were scary for people old as I am now. They weren't participants in the riots, of course, and neither were many "middle class" income earners.

I think this Summer, in Detroit and LA for sure if it's a hot Summer, there might be a "litmus test" of free society's life blood coming.

On a lighter note, it's March 1st, and I notice the roads out of South Florida are full of Canadian license plates heading northward. Your neighbors should be home soon - and maybe having some goose soup. -gg.

Posted by: spot at March 1, 2006 1:38 PM [link]

The Investors Intelligence survey came out and showed that there hasn't been this many folks bearish on the market since March 2003. And you know what happened around that time. The SP500 bottomed on March 11th. Then shot out of a cannon to the upside.

Everyone is bearish, but I think that's about to change. Could be explosive to the upside. We shall see. That'd be great.

On the negative savings rate... That doesn't measure people's growing wealth, because it excludes capital gains on investments.

Posted by: muckdog at March 1, 2006 3:01 PM [link]

Feds keep it low so they pay out less for Social security checks, which has an inflation factor. Basically, they can't afford it.

Keep it un-real ! Ha!

Posted by: ekc at March 1, 2006 8:12 PM [link]