Minyan Mailbag: Weathering the Storm of High Energy Prices
...the situation is far more complex and involves many different variables that are important.
Dear Professor Succo,
Bloomberg TV ran a piece this morning that basically said American consumers can weather the storm of higher energy prices. One economist in the piece did not agree with that assessment. One of the economy bulls, Mike Darda of MKM partners, said that total disposable income since 2001 is up $1.5 trillion dollars, against a $225 billion increase in total energy goods and service spending. When we say disposable, are we strictly talking about after tax income, are we throwing in money pocketed from mortgage refi's? Because when I see that avg. hourly wages as reported by the Department of Labor are running at +2.9% annually, and the consumer price index is running at +4.7% yoy, and 2.0% ex. food and energy, that tells me income is barely keeping up with inflation if you strip out anything that matters and is not keeping up with inflation when every day items are thrown into the mix.
Personal income is the income received by persons from all sources, that is; from participation in production, both government and business transfer payments, and government interest. 'Persons' consist of individuals, nonprofit institutions that primarily serve individuals, private noninsured welfare funds, and private trust funds. Personal income is calculated as the sum of wage and salary disbursements, other labor income, proprietors' income with inventory valuation and capital consumption adjustments, rental income of persons with capital consumption adjustments, personal dividend income, personal interest income, and transfer payments to persons, less personal contributions for social insurance.
Disposable income is defined as personal income (above) less tax & non-tax payments.
Yes, personal income is up $1.27 trillion since the beginning of 2001. Disposable income is up $872B in the same period: a net $400B change. I cannot replicate his assertion that there has been a $225B increase in "energy spending" in that time. It is unclear from what data series he determined that figure.
Let's assume it's true anyway. We already know that energy expenditures are a far smaller percentage of economic activity overall today than it was in the 1970-1980s. Attached is a chart depicting gas and energy spending as a % of total GDP (a subset of total energy expenditures). You can see that, as the US economy has moved away from manufacturing and industrial production (and exports) we have become more service oriented and more import-centric in the source of economic growth. As a result, energy fluctuations have less impact on total economic activity. Taken in isolation, one could look at this argument and conclude that all is well and good with consumer spending going forward.
But the situation is far more complex and involves many different variables that are important. As the $9.7 trillion in annual personal income makes its way into, say, the $4.1 trillion of annual retail sales, factors like savings rate, indebtedness, debt service payments, energy prices, food prices, wage and salary income, and asset/dividend gains are ALL important (as well as others I have not even listed).
When you are dealing with an economy as imbalanced as the current global one is (and even the Fed agrees with that statement), it is the MARGINAL changes that matter to the stability of the prevailing trends. So the factors you identified (wage and salary income trailing CPI since 2004 to present), remain an important (and negative) component of the analysis even though the prima facie argument is that personal income is so much larger in absolute terms than energy expenditures.
As an aside, the difficulty in coming to a confident macro conclusion (see above) is why we watch proprietary liquidity figures and market-based signals (complexity analysis) in addition to the macro work we do. No investment decision should ever be made based on one data point or one methodology.
This is another great example of why sound bite analysis - the only kind that matches the business model needs of television - is utterly incapable of imparting any real insight. This is why we emphasize that markets are not linear and why linear analysis like this is so fraught with error.
Professors Scott Reamer and John Succo
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