The Consumption rate from Capital Income (Labor Day special)

In honor of LABOR DAY…

Yesterday, I posted a graph showing the percentage of capital income that is used for consumption. It is a new graph being developed. Since yesterday, I have gone back and changed just one number that determines the consumption rate of capital income. I replaced the number for “net government saving”, line 26 from table 3.1 Government Current Receipts and Expenditures of the BEA web site,with the number for “net lending or net borrowing (-)”, line 38 from the same table. One reason this number is better is because it includes gross government investment, which is an important factor for lending and borrowing by the government.

After substituting in the new number, I re-ran the chart. Here it is…

capital C 4a

link to Graph #1.

Here is the previous graph from yesterday for comparison…

capital C

Link to graph #2.

The plot of the graph changed quite a bit for the data before 1972. But since 1972, the general shape of the plot has stayed pretty much the same. The revised graph #1 shows that capital income consumption sort of bounced along 0% from 1980 to 2003. It moved within a range from -5% to 9%. The fact that the plot went occasionally negative may be a sign that the numbers still need some calibration, but the shape and placement of the plot is what would be expected. A lower percentage of capital income used for consumption would be expected, because it is primarily used for investment and lending.

It may be useful in graph #1 how the plot fell before the last two recessions, which would be an indicator that a recession is forming. Capital income “feels” economic trouble ahead before labor.

In graph #1 when we look at the plot since 1993, we see that capital income is stepping upward its ability to consume from recession to recession. (purple arrow) What does this mean? Is this something we should be concerned about? Does it imply that the next recession might be even more intense?

An increased use of capital income for consumption implies increased liquidity among capital income. Where is this liquidity going? What is it doing? The economy looks to be even more “top-heavy”, which would be a source of greater instability.

Using the newest data for 2nd quarter 2013, graph #1 says that the consumption rate of capital income is currently 21.7%. This rate hasn’t been seen since right before the 1973 recession. How much higher can this rate go before it turns back down toward a recession?

OH, and just in case you wanted to see Labor income’s consumption rate…

capital C 5a

Link to graph #3.

Is it any surprise that labor has had to use more and more of its income for consumption? Even through the days of easy consumer credit? Do you see the imbalance becoming clearer between labor and capital since 2001? My view is that labor uses more of its income for consumption because it has to. Capital uses more of its income for consumption because it has extra money.


Update… The graphs above were adjusted for data before 1960.

Note: The numbers in the graphs are not to be taken as accurate until they can be calibrated. Nevertheless, the pattern of the plots is the message of this post.