After eight years of benign neglect I was hopeful that this would be the election cycle that the Democratic party would get a clue about middle class problems. When you go over to the Hillary Clinton For President site you see her “eight ways we can give American families a raise“.
Cut middle-class taxes.
Make college affordable.
Raise the minimum wage.
Rebuild our infrastructure.
Boost manufacturing jobs.
Invest in clean energy.
Lower child care costs.
Most of these suggestions will not help me at all. Two of these suggestions, rebuilding our infrastructure and boosting manufacturing jobs, might help me indirectly. This is such a meh group of ideas you have to wonder what drove them away from bread and butter issues for the middle class like the economy, government corruption, jobs, immigration, and the rising cost of health care. It just not me saying this. The most recent Gallup poll asked, What do you think is the most important problem facing this country today? The top four issues listed were the economy in general, dissatisfaction with government, unemployment/jobs, and immigration. I hate to say it but the non-politician, Mr. Trump, seems to know the issues bothering the country and the professional politician, Ms. Clinton, does not!
Her next suggestion was to put Bill Clinton “in charge of revitalizing the economy“. The problem I have with Mr. Clinton’s economic record is that his success depended largely on the on the productivity gains from expanding the use of personal computers in the work place. By the time he left office there were no more places left where productivity would improve from using personal computers. If you look at recent year to year productivity gains, you can see that the decline in the personal computer business from 2000 to 2010 matches the decline in productivity gains. If you believe that productivity growth results in real economic growth for the middle class then you can understand why the lack of productivity gains coupled with a financialization bubble has made life miserable for the middle class. If we assume that the financialization bubble over the last 8 years is over then we are left with searching for productivity gains in an increasingly socialist economy. Something has got to give and sadly Ms. Clinton is clueless!
I was looking at a debate between Mr. Davis and Mr. Perry over inflation. Mr. Davis started out the debate with this provocative article, American Families Are Right To Be Worried About Inflation, and Mr. Perry responded with his own chart showing that average hourly earnings grew faster than inflation. Since I do the grocery shopping for our family my gut feeling says we are experiencing mild inflation in excess of wage growth. So who is right? In almost all cases like this I go over to FRED and chart some data.
My first reaction to the debate was Mr. Perry’s selection of average wage earnings. The logical choice would have been real disposable income since it removes personal current taxes and inflation and is readily available at FRED. For the average person the only wage growth that matters is what they have after taxes.
If we look at a Fred graph of real disposable personal income versus the two CPI measurements, we can see that the graph confirms Mr. Davis’s statements who claims that “food inflation blows away wage growth” and “food prices have soared since 2009”. If we adjust the real disposable personal income for population growth, the difference is even more dramatic. So what is the best way to measure wage growth, average wage earnings or real disposable personal income per capita? They tell different stories.
I continue to be fascinated with forecasting that errs in only one direction. A couple of days ago I made fun of GDP forecasting in the post, Who Is The Better Forecaster, The Economist Or The Climate Scientist? The good news is that these “scientists” are not building stuff that could hurt us like cars or airplanes. For the last couple of years the initial GDP estimates are consistently too optimistic and the chart below continues that trend. Today I found out that the Atlanta Federal Reserve’s GDPNow forecast is expecting 2.6% GDP growth for the second quarter of 2014. It should not be a surprise to anyone that this estimate is at the bottom of the range for GDP forecasts and will leave us at a negative growth rate for the first six months of the year. For those of you who like to look at the details the Atlanta Federal Reserve has graciously provided the spreadsheet they use to make the GDPNow forecast. Here is the latest forecast from their site.
Latest forecast The GDPNow model forecast for real GDP growth (SAAR) in 2014: Q2 was 2.6 percent on July 10, unchanged from its July 3 value. This morning’s wholesale trade release from the U.S. Census Bureau had no effect on the GDP nowcast after rounding.
I am puzzled why health spending had such a large impact on first quarter GDP report. I thought the Affordable Care Act impacted the health care expenditures for only a small part of the population. Other people are puzzled, too. The best article that I have found that partially explains the impact of health care spending on first quarter GDP is, “Health Spending and First Quarter GDP: What Happened?“, but it fails to explain why such a small component of the GDP had such a large effect.
When I get puzzled with economic data, I go over to FRED and plot some data. So if we follow Tyler Durden’s lead of plotting quarterly changes for health care expenditures and include the Real Gross Domestic Product series we get this graph. You can see that the quarterly change in GDP dwarfs the health care expenditures and it is hard to see much of a correlation between these two indices. Unless we are willing to believe that the tail can wag the dog, we have to conclude that the 2.9% decline in the economy was for economic reasons other than health care expenditures. The impact of changes in health care expenditures is still a minor factor in the GDP growth. The Affordable Care Act taxes are probably holding the economy back a little bit but if we want to grow the economy we have to do it the old fashion way by making things bigger, better, faster, or cheaper.
One concludes from this analysis that both year-to-year fluctuations in national health spending and the longer-term trend in that growth rate are driven primarily by current and prior-year changes in macroeconomic conditions.
I was curious about how he reached his conclusions since it reminded me of the John McDonough’s macroeconomic premise in the article, “Does Massachusetts Have the Nation’s Highest Health Insurance Premiums? It Depends.” In that article Mr. McDonough speculated that the reason Massachusetts has the highest health insurance premiums in the country is because they have the highest median income. In other words health insurance premiums migrated to the highest price the Massachusetts market would bare. In Mr. Reinhardt’s article, Controlling Health Care Spending, Revisited, I found a fascinating graph of the year to year growth in real per capita health care spending. My immediate question is what happened to real per capita income over the same time frame? Since I know how to get income data from FRED here is my version of the two indicators on the same graph. For those who are curious I estimated the year to year growth in real per capita health care spending from the NYT graph so I could put it into an Excel spreadsheet. It sure looks like the year to year increases are trending down to the increase in real disposable income. This would be a logical result in an environment where out of pocket costs are increasing and the country is increasingly sensitive to health care spending increases that exceed the general inflation level. If the large businesses and government entities that sponsor large group health insurance plans are unwilling to expand their contribution to health care spending, you have to wonder how we can expand our health care spending without a major increase in GDP and real per capita disposable income. If the predictions of slow GDP growth are correct then it looks like we are playing a game of musical chairs and the music is winding down. Even if there is no health care inflation then “someone” is being set up for a cost squeeze as we expand the health care system and its not likely to be the consumer. They look like they are tapped out. This reminds me of the typical problems faced by out of control entitlement systems. We have seen the future of health care and it looks a lot like Detroit.
So I went back to my old graph , added a line for corporate profits, adjusted it for inflation using the GDP deflator, and got the graph below. Since the Real GDP uses the GDP deflator(GDPDEF) as the inflation adjustment, I adjusted the other lines using the GDP deflator as the inflation adjustment. Maybe its just me but it sure looks like the blue line for corporate profits is following the green line for Federal Debt: Total Public Debt (GFDEBTN) since 2000.
When you look at my graph it sure looks like the current profitability is the result of the willingness of the federal government to issue debt. If businesses profits were primarily due to increases in sales then the corporate profits would be following the red line for the S&P 500. In this case it is above both the S&P 500 and the black line for the GDP. If we focus on the last 13 years we can see that corporate profitability trend line is more closely aligned with the debt line. Oops, there goes the narrative that the corporate profits are up because wages just hit an all time low! The corporate profit increase over the last 13 years was debt driven! Since several economists have described this recovery as a balance sheet recovery, it is no surprise that wage growth has been stagnant. Corporate profit increases without wage growth are inevitably fake profits and that explains the lack luster enthusiasm in the S&P 500 stocks. When your accountant is generating more earnings than the guy or gal working down on the floor, you have a troubled business. This is not complicated. Debt fueled corporate profits were fun but now we have the same tough job ahead of us. If we want higher wages and a growing S&P 500, then we must have real sales growth coupled with productivity increases. This quest is as American as baseball and apple pie. If higher wages and an increasing S&P 500 price is our goal, then our reliance on debt is a distraction and a hindrance. When we fail to create real corporate profits and rising wages it is because we took our eyes off of the ball.
A couple days after writing this post I was pondering the question of where did the corporate profits go and why the rising corporate profits were not lifting all ships. Rising corporate profits usually result in high factory utilization rates and labor shortages. This situation typically resolves itself with rising wages, strikes, and sometimes both. Without seeing rising wages in this recovery it seems like the rise in corporate profits was the result of a shell game rather than real economic gain. Then I saw the article written by Jeffrey Tucker on the Daily Reckoning, This Car Won’t Move. The cartoon I included below from his post explains both the corporate profitability and why we have not see rising wages problems quite well. It may be hard to see but if you look closely you will see the wage earners are out there swimming with the sharks.