US Consumer Spending, Residential Investment Driving a Weak Economy
$DIA, $SPY, $QQQ, $VXX
The demand side of the US GDP accounts shows that the nations economic engine has 6 cylinders, they are:
- consumer spending
- residential investment
- capital spending
- net exports
- government spending.
In recent Quarters, it seems like most of the US economy’s power has been provided by the 1st 2 cylinders, while the others sputter.
On the income side of the GDP accounts, there are also 6 cylinders, as follows:
- labor compensation
- dividend income
- rental income
- interest income
- corporate profits
- income redistribution.
In recent Quarters, 4 of them have been “humming” along fine, while interest income and corporate profits have been sputtering.
In a perfect world, all 6 cylinders should be well tuned in a “humming” economy.
But, this rarely happens, and when it does, it does not happen for very long. So, if the economy gets enough power from enough of the cylinders, there is no need to worry about stalling, though the economy’s speed is disappointing.
The Horsepower according a leading economist that I read, as follows;
- The new cruise speed. Real GDP was revised higher for Q-1 from 0.5% (SAAR) to 0.8%. On a Y-Y basis, it rose 2.0%. That is more or less what it has been doing since mid-2010, when the Bears started growling that 2% was the economy’s stall speed. That was true in the past, whenever growth slowed to that speed, a recession followed. So far, 2% appears to be the “new normal” economy’s cruising speed. Today’s economy has not been able to travel in the old normal’s fast lane of 3%-4% growth. The big drag on growth during the current business cycle has been weak government spending on goods and services. Excluding this category, real GDP grew in a range between a low of 1.8% during Q-2-2013 and a high of 4.0% since mid-2010, and averaging 2.9%. However now it is back to the bottom of that range.
- Wages accelerating as profits slow. The National Income and Product Accounts (NIPA) show that the demand side of GDP must be equal to the income side of GDP, i.e., GDI (Gross Domestic Income) plus a small statistical discrepancy. GDI is equal to National Income plus Consumption of Fixed Investment. The statistical discrepancy between nominal GDP and GDI has been negative since Q-1-2011, and hovering around 1.5% of GDP since Y 2012. During the current economic cycle, the share of pre-tax labor compensation in national income fell from 66.2% during Q4-2008 to a low of 60.9% during Q3 Y 2014, which matched its Q-4-2011 reading–with both the lowest since Q-1-1955. Over the past 6 Quarters through Q-1-2016, this share has risen smartly back to 63.1%. Meanwhile, the share of pre-tax corporate profits from current production (i.e., on a cash-flow basis) in national income jumped from a cyclical low of 8.4% during Q-4 Y 2008 to a cyclical high of 14.5% during Q-4 Y 2011, which was the highest since Q-4 Y 1950. It remained around there, but then dropped down to 12.0% during Q-1 Y 2016, mostly over the past 6 Quarters. On a Y-Y basis, labor compensation is up 5.0% while profits are down 5.8%. Workers finally may be gaining income share as the labor market has tightened, boosting both employment and hourly pay. This development is squeezing profit margins.
- Consumers on a healthy joy ride. This certainly explains the strength in real consumer spending, which rose 2.7% Y-Y during Q-1, outpacing overall real GDP growth. In current USD, that growth has been led by consumer spending on healthcare, which is up 4.8% Y-Y, while total consumer spending is up 3.8%. The rising share of consumer spending in nominal GDP over the past 45 yrs is all attributable to healthcare. The overall share of consumer spending has risen from a series low of 58.5% during Q-1 Y 1967 to 68.6% during Q-1 of this year. Excluding healthcare, the share has been hovering in a range between 53% and 56% over this entire period. Real consumer spending excluding spending on health care goods and services has slowed recently, and may continue to do so as the average age of the US population increases because people are living longer and the fertility rate is relatively low. Older people are likely to spend more on health care and less on everything else. Health care spending, in current USD’s, now accounts for a record 19.0% of disposable personal income, up from 14.4% 20 years ago.
- Business tapping the brakes. The recent downturn in the profit margin and the long-term uptrend in consumer spending on healthcare may weigh on business spending. Nonresidential investment is driven by profits. A profits squeeze attributable to rising labor costs could dampen business enthusiasm to increase plant and equipment capacity. If the economy’s fastest growth comes from consumer spending on healthcare, that might not have multiplier effects on business spending as large as we would see from lots of spending on autos, say.
The recent data on non-defense capital goods orders excluding civilian aircraft have certainly been disappointing. In April, this series was down 5.0% Y-Y to the slowest pace since April 2011.
Inventory indicators also may be signaling an overhang of materials and merchandise. Commercial and industrial loans have soared 10.1% Y-Y ($190-B) through mid-May.
Inter-modal railcar loadings have been seasonally weak recently, suggesting that inventory levels may be bloated. The ATA truck tonnage index, which spiked in February, reversed the jump in March and April.
4 of the 5 Fed business surveys are available for May, i.e., Kansas City, New York, Philadelphia, and Richmond.
When they are averaged and the experts have found that they are relatively well correlated with the US national manufacturing PMI. The latest available data on the economy for the 3 available surveys show that the average of the composite indexes fell from 4.5 last month to -4.2 this month. The average of the orders indexes fell from 6.8 to -2.6. The employment index edged up from -5.1 to -2.6, remaining below Zero for the 11th month running.
Wednesday, the US major stock market indexes finished at: DJIA +2.47 at 17789.67, NAS Comp +4.20 at 4952.25, S&P 500 +2.37 at 2099.33
Volume: Trade was about average with about 880-M/shares exchanged hand on the NYSE.
- S&P 500 +2.7% YTD
- Russell 2000 +2.3% YTD
- DJIA +2.1% YTD
- NAS Comp -1.1% YTD
|HeffX-LTN Analysis for DIA:||Overall||Short||Intermediate||Long|
|Neutral (0.19)||Neutral (0.10)||Neutral (0.04)||Bullish (0.42)|
|HeffX-LTN Analysis for SPY:||Overall||Short||Intermediate||Long|
|Neutral (0.23)||Bullish (0.29)||Neutral (0.19)||Neutral (0.21)|
|HeffX-LTN Analysis for QQQ:||Overall||Short||Intermediate||Long|
|Neutral (0.23)||Bullish (0.33)||Bullish (0.33)||Neutral (0.01)|
|HeffX-LTN Analysis for VXX:||Overall||Short||Intermediate||Long|
|Bearish (-0.36)||Bearish (-0.48)||Bearish (-0.45)||Neutral (-0.17)|