One economic variable that I track is the percentage of capital income used for consumption. It is not an exact number but an estimate in order to see trends over time. With the new revisions to GDP out today, I will update this variable.
I have previously said that consumption by capital income would drop this year as the stock market hits a plateau. In April, I said that the Dow Jones would rise to around 16,800 and move around that level. Some 3 months later, I look at the Dow right now and see it is at 16,851… Still within range.
A drop in consumption by capital income would offset increases in consumption by labor income.
So what is happening to the use of capital income for consumption?
The most recent data, which will be subjected to further revisions later, is showing a drop in consumption by capital income. How much money would this represent?
This graph estimates a drop from $1.108 trillion to $882 billion from 1stQ to 2ndQ. This is a drop of $226 billion. The estimated consumption by labor income rose by $292 billion. So there was a net rise in consumption of $66 billion from 1stQ to 2ndQ.
Now I compare the rates at which labor and capital incomes consume. (Labor consumption is orange. Capital consumption is blue.)
We see the drop in capital income consumption below. The rate of consumption by labor income is trending just a bit upward, but holding quite steady. Since the 1980s, the rate of consumption by labor income tends to bloom upward after a recession, then begin a soft rise before the next recession.
Just one more graph to show that the savings rate of capital income rose in 2nd quarter.
Past trends have shown that once capital income starts preserving itself through increased saving, a path to a recession forms. There has been a floor of 58% since the 1980s. The plot hit that floor twice recently and has moved up to 64%. It now looks to be possibly rising. The implication would be that the end of the business cycle is upon us and we have turned a corner toward an eventual recession.
Of course, the above graphs will be revised in the following months, but at least we get a preliminary look at an important trend. I am expecting the trends to continue developing a path to the next recession.
It is important to read the movements of capital income as they tend to have more insight into the trends of the economy.
Lambert, Edward. How to calculate capital income’s consumption rate for recession forecasting. Angry Bear blog. September 4, 2013.
Lambert, Edward. Consumption by Capital Income could be falling… Look out. Angry Bear blog. May 30, 2014.