U.S. Personal Consumption and Income Down While Inequality Widens Sharply

By the Curmudgeon with Victor Sperandeo  



Economic recovery for whom?  While "fat cats" on Wall Street, VC's and overpaid CEOs rake in the dough, the rest of the country is struggling to make ends meet with a raft of problems we identify in this article.  We look at consumer liquidity, decelerating consumer spending (vs GDP) and declining incomes and then state the implications of these negative factors.  Next, we examine income inequality before ending with Victor's insightful closing comments.

Consumer Liquidity Problems Continue to Restrain Consumption:

That was a subheading in the latest ShadowStats report (paid subscribers only).  John Williams wrote:

"Serious, structural liquidity problems continue to constrain consumer activity.  Without real, inflation-adjusted, growth in income, and without the ability or willingness to take on meaningful new debt, the consumer simply cannot sustain real growth in retail sales or in the personal consumption activity that dominates the headline growth in GDP."

Courtesy of www.ShadowStats.com

A March 20, 2014 blog post by Marc Wiersum, MBA underscores the problem of declining consumption in the U.S.  The graph below reflects the trend in U.S. personal consumption as a percent of gross domestic product (GDP) since 1980.  Note the sharp decline in trend growth since December 2010.


That decelerating growth pales in comparison to the precipitous drop in household income since late 2009, as depicted in the graph below:



Chart: Courtesy of Sentier Research LLC

Implications of Decelerating Spending and Declining Incomes:

The bottom line is that for a very large number of American households, there has been no economic recovery at all, just as the Curmudgeon has been stating for years now!  The overwhelming majority of Americans have been caught in a vice of chronic unemployment and falling wages with the fear of prolonged unemployment if they lose their current job.  In tech la-la land, social media/chat start-ups fetch billions of dollars with no revenue or monetization models. But why is it that established tech companies like IBM, Intel, Cisco and Sprint have recently announced large layoffs, AKA reductions in work force (RIF)? Is that a symptom of a healthy economic recovery?

The Washington Post reports that real median household income (excluding capital gains and losses but including cash government benefits) has declined 4.4% since the “recovery” began in 2009. For many households, the drop has been more severe.  For African-American households, it is 10.9%.  For those under 25 years old, it is 9.6%.  For single females with children, it is 7.5%. Indeed, the only households to experience an increase in real income are those 65 to 74 years old.


Sheila Barr, former Chair of the Federal Deposit Insurance Corporation (FDIC) wrote:  "In 2014, let’s face up to the ineffectiveness of monetary policy to help them and the desperate need for fiscal leadership to generate real, sustainable growth."

Income Inequality Continues to Widen; Findings from Several Studies:

1.  Last month, the Brookings Institution published a research study that was highlighted in the NY Times.  The study found that inequality is sharply higher in economically vibrant cities like New York and San Francisco than in less dynamic ones like Columbus, Ohio, and Wichita, Kansas.   

Many U.S. cities are trying to remedy income inequality and expand opportunity through measures like increasing the minimum wage and increasing taxes on the wealthy.  In no city is the effort more prominent than in New York, where Mayor Bill de Blasio has promised higher taxes for rich families and better services for poor ones, including expanded early-childhood education and affordable-housing developments.

In some cases, higher income inequality might go hand in hand with economic vibrancy, the study found. “These more equal cities — they’re not home to the sectors driving economic growth, like technology and finance,” said its author, Alan Berube. “These are places that are home to sectors like transportation, logistics, warehousing. In terms of actual per capita income growth, these are not places that would be high up the list,” he added.


The study confirms what many others have shown:  that the country’s big cities tend to have higher income inequality than the country as a whole. For instance, in the 50 biggest American cities in 2012, a high-income household — which the study measured at the 95th earnings percentile, putting it just into the top 5 percent — earned about 11 times as much as a low-income household, at the 20th percentile. Nationally, that ratio was 9 to 1.


2.  It’s not surprising that another study of income inequality- this one by real estate firm Trulia - found that the gap between the rich and poor has increased in 94 of the 100 largest metropolitan areas since 1990. And that growth gap has accelerated in the past few years.  The Trulia report has very interesting tables of where income inequality is highest and lowest.  It stated that Fairfield County, Connecticut - home to hedge fund titans living in Greenwich as well as the impoverished city of Bridgeport - has the sharpest inequality, when comparing the 90th and 10th income percentiles. It should come as no surprise that New York City and San Francisco are in that same quadrant.


Income inequality has grown in nearly all of the 100 largest metros. Between 1990 and 2012, the 90/10 ratio increased in 94 of the 100 largest metros – above all in San Francisco, Fairfield County, and San Jose. The 10 metros where inequality increased most include four in California and five in New England, as well as Honolulu.


At the other extreme, the least unequal metros in America include three in Florida that are popular with retirees: Lakeland-Winter Haven; Cape Coral-Fort Myers; and Palm Bay-Melbourne-Titusville. But equality isn’t just for places with lots of older folks: Salt Lake City and Raleigh are also among the least unequal metros despite having relatively young populations.


The report also took a close look at the relationship between housing costs and income inequality, given that high rents and prices can drive out middle-income workers and put significant burdens on the poor.


3.  The NY Times did its own study this month.  It compared income inequality in two nearby counties in Virginia- not too far from Washington DC:  Fairfax County, VA, and McDowell County, West VA., are separated by 350 miles, about a half-day’s drive. 

Fairfax is a place of the haves, and McDowell of the have-nots. Just outside of Washington, fat government contracts and a growing technology sector buoy the median household income in Fairfax County up to $107,000, one of the highest in the nation. McDowell, with the decline of coal, has little in the way of industry. Unemployment is high. Drug abuse is rampant. Median household income is about one-fifth that of Fairfax.


One of the starkest consequences of that great income divide is seen in the life expectancies of the people that live there. Residents of Fairfax County are among the longest-lived in the country: Men have an average life expectancy of 82 years and women, 85, about the same as in Sweden. In McDowell, the averages are 64 and 73, about the same as in Iraq.


“Poverty is a thief,” said Michael Reisch, a professor of social justice at the University of Maryland, testifying before a Senate panel on the issue. “Poverty not only diminishes a person’s life chances, it steals years from one’s life.”


The reality of a poverty shortened life is prevalent across the country. For the upper half of the income spectrum, men who reach the age of 65 are living about six years longer than they did in the late 1970s. Men in the lower half are living just 1.3 years longer. That's a very sad consequence of income inequality in America.


Victor's Comments:  The Real Causes of Income Inequality in the U.S.

Income inequality is normal and should be expected in a free country under capitalism.  Free market countries like Singapore, Hong Kong and the U.S. have high Gini Indices (measures of income inequality).  On the other hand, communist states like Cuba, North Korea, and Venezuela have virtually perfect equality (extremely low incomes for all-except the rulers).


The fact is from January 1971 (when Nixon took the U.S. off the Gold Standard) to January 2014 the official CPI has compounded at a 4.26% annual rate.  Now please think of any middle class person - measured as a group within a quintile - that can earn a raise of 4.26 % "after taxes," considering the "tax bracket creep" over the last 43 years?  Not many. Hence, wages have not kept up with inflation and real incomes have fallen over the last four plus decades.


Note:  The fall in real incomes is actually worse, because reported inflation is and has been greatly understated. The U.S. government reported that the CPI was +1.5% last year.  Does anyone seriously believe that number?  I maintain that inflation has been deeply understated - not only in 2013, but since 1980 (see John Williams inflation calculations at ShadowStats.com). Therefore, real wages are actually lower than reported, which exacerbates income inequality.


No one ever discusses income inequality in terms of the actual cause being directly associated with the government.  In the U.S. it might be mainly due to the Federal Reserve Board (the Fed).  Of course, the Fed's part in income inequality is only half the equation.  The other half is fiscal policy (free market vs socialism).


The Fed has kept the Fed Funds rate at zero, has done two "operation twists," and three QE's in the last 5.25 years. That has directly caused the S&P 500 to appreciate by 180% from the low March 8, 2009 to date.  The top 5 % of the highest quintile income earners own financial assets, especially equities. So they have profited greatly, while the remaining 95% of income earners have not.  In my opinion, this wealth effect, combined with inflation eroding real wages, have caused the continuing and expanding income inequality.


Zero Hedge: QE Was A Massive Gift Intended To Boost Wealth, Fed President Admits:  

         With Bernanke gone, the remaining Fed members knowing full well they will be crucified, metaphorically of course (if not literally) when it all inevitably comes crashing down, are finally at liberty with their words... and the truth is bleeding out courtesy of the president of the Dallas Fed, via Bloomberg. "FISHER SAYS QE WAS A MASSIVE GIFT INTENDED TO BOOST WEALTH."

The incredible moral conclusion is the people in government who claim to care most about the poor and middle class are causing them to end up in ruin, while rewarding the highest income sector - all in the name of the "wealth effect."  That stated policy (AKA "trickle-down economics") is disparaging, false and very bad economics!

What is never observed or stated by the "free press" is that the Fed's policies of the past 5.25 years have failed the public (=main street) miserably, while making geniuses of ever more wealthy stock holders.

This is visibly demonstrated in U.S. GDP, which over the last five years is growing at the lowest rate in 70 years! Even the unemployment rate is bogus as the work force (labor) participation rate is at lows not seen since the Carter administration.  Yet 6.7% unemployment rate sounds like victory, even though many discouraged unemployed people have dropped out of the work force?


Yet the Obama administration takes credit for a (non-) recovery, while the Fed has saved us from depression (via the "wealth effect" beneficiaries) by aggressively printing fiat money.  The truth is that the Fed's monetary policy has not worked.  For most people, there has been no economic recovery.

So would the Fed dare change policy? Not if it causes equities to decline!  I have no issue with the bull market, which is now a bubble.  Money will always return to its rightful owners over a full market cycle. 


However, what I take extreme umbrage at is the incredibly obnoxious direct attack on "capitalism" by suggesting income inequality is harmful or unfair.  Again, it is to be expected in a free capitalist country, but not nearly as extreme as it is now.


The Curmudgeon and I have written about the move to socialism, crony capitalism, and "economic control of property and assets without ownership."  That combined with the Fed's "Central Planning" schemes are the real, root causes of income inequality in the U.S.

Till next time........................


The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1979) to profit in the ever changing and arcane world of markets, economies and government policies.  As President and CEO of Alpha Financial Technologies LLC, Sperandeo overseas the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Copyright © 2014 by The Curmudgeon and Marc Sexton. All rights reserved.

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