Relevant and even prescient commentary on news, politics and the economy.

A Bleg – Private Consumption Multiplier

from Mike Kimel

Hi. For a project I’m working on, I need to find estimates of a private consumption multiplier. That is to say, the multiplier resulting from changes in private consumption rather than, say, from changes in gov’t spending or taxation. Any pointers? Please let me know in comments are by email (mike period kimel at Thanks.

It’s not the tax and spending cuts, it’s the destroyed trust that has doomed our economy

By Daniel Becker
In the comments to my post “A reminder from Obama’s February 2009 speech”, there is the following:
“I guess it relates to the fake Obama they had made up in their heads,…” 
This sums up the early comments to the post suggesting that those who trusted Obama have only themselves to blame.
I addressed that concept in Obama, is he or isn’t he real…?  In that post I presented transcripts of Obama’s speeches and responses to questions and then argued:
“Are those talking like Glen Greenwald correct in that people should not be surprised with Obama’s appointments? Maybe, but then based on the above Obama words, that would mean we (you and I) just plain have to approach our relationship with governing as suspect until proven otherwise. Unfortunately, that means we will always be a day late and a dollar short having never known at the time of the decision if we made the correct one because you can not go by what is said.”
I recommend people go and not only read the posting, but the comments. (History is always fun to review.)
I concluded that posting with:
“Do you know what happens to a person when they can never get a straight, no hidden agenda answer from one they count on? They go nuts.”


This all speaks to the issue of growing our economy, because to promote distrust in a developed economy where 77% of our capital is intangible (via 2005 World Bank study) is to be destroying the prime driver of our growth. I wrote about the issue of were our true wealth comes from a few times. For this posting I am drawing on Attention Republicans/Blue Dog Democrates: Tax cuts as stimulus work against your goal.
February 5, 2009.
From the World Bank study:
“An economy with a very efficient judicial system, clear and enforceable property rights, and an effective and uncorrupt government will produce higher total wealth.”
I concluded:
“The republicans/blue dogs, and those helping them by lending their “professionalism”, think they are only effecting a political strategy. In truth, they are destroying the very basis for the wealth they desire. Their entire campaign for decades to discredit, to instill mistrust in the primary institution we have, the US (We the People) government, has been the primary cause to our economic decline. To increase the level of distrust is to decrease the available “intangible capital” which is 77% of our wealth generating power. “
Which brings us to what we just experienced with the debt ceiling issue. It’s not just the resulting budget changes, it’s the overall cognitive change being made in the people regarding trust of our ability to access a candidate and make the choice that will produce the desired results. Clinton, as for the Dems made the first blow to our trust with “triangulation”. I can and have on my own gone back and read speeches and answers to questions by Clinton during his first run and it shows the same as I note regarding Obama in “is he or isn’t he real”. Obama is (knowingly or not) bringing our trust close to death. 
Even the debt ceiling event is only the latest in a string of recent events that all drive an additional spike into the coffin of “trust”.
Last night on Racheal Maddow’s show, Chris Hayes, noted that we are now in a phase of governance where “created” crisis is the vehicle for results. Yes, Shock Doctrine governance level II.. It was presented from the perspective that the conservative mind set is the one employing such a tactic.

In my opinion, what he missed, and what makes this a unique form to this nation’s version of Naomie Klein’s Shock Doctrine is that there are enough economically conservative minded people in the opposing party (democratic party in this case) that the ruse can be played out with a more believable presentation than if just one side is playing along. Yes, both side play it differently, but would that not be expected based on the supposed “base party” paradigms? At no time during any of these “crisis” did the primary players on the democratic side resist the crisis by calling it out. Instead, they used it to get what the conservative faction of the party (a smaller faction since the last election) wants. These “wants” being very much inline with the republican non Norquist/Tea Party faction’s wants. Commonly referenced as Wall Street. In the end, no one to blame…It was the crisis.
This pattern has held true through out Obama’s current term.  In the latest example, the proposed budget from the house progressive caucus, the largest of the democratic party caucuses never was mentioned by the president. Recall the single payer health insurance issue?
The issue for this posting is not the “wants”. It is not about the resulting policy from the latest ruse played on We the People. The prime issue, the issue always suggested, implied, bandied about, but never out and out confronted: Public Trust.
This latest Obama/conservative policy process has brought us closer than ever to the demise of our economy and thus our democracy not primarily by the furthering of the financial disequilibrium, but by the perpetuation and enlarging of the perimeters of social order that will now be distrusted. I think we have approached, if not completely included the full boundaries of American culture in that which is to be distrusted with the completion of this debt crisis event. 
Sadly, I do not think Obama and those referred to as the “adults in the room” know what they have done. Instead. as I stated above, they believe they are just “effecting a political strategy”. 
There are 2 versions of distrust. First is the distrust nurtured by those who have made it a political tool of their strategy for political dominance, power and fortune. It is the “…most dangerous words in the English language: I am from the government and I am here to help you”. These people do not know that in essence their distrust is part of the ruse. The other distrust is those who see the ruse, have acted via those they trusted only to find they can no longer be trusted. I don’t believe one is worse than the other, but I do know having both means the solution will be slower in materializing. In both cases those in power can not be trusted and those who know it, presently have no one in power to represent their solutions.  It serves to make the what is the solution clear, it does not server to make it any easier or quicker in coming.
I do not believe this mode of operation is forever simply because we are not naturally selfish, self serving for survival sake creatures. We are not naturally so shallow in our collective thinking. It is only in our isolated, individual thought that we can and will be shallow. Of course this assumes that the concepts and application of virtual reality throughout our daily lives does not mutate us way from our natural self.  A big assumption considering “reality” is in the phrase “virtual reality” and the character dynamic is trust.

The Q2 US GDP report – just terrible

Bureau of Economic Analysis today reported that real gross domestic product in the US increased at an annual rate of 1.3% in the second quarter of 2011. This (newly revised – see below) acceleration in real GDP was driven primarily by a slowdown in import demand, stronger federal spending, and a pickup in non-residential fixed investment. Real gross domestic purchases – GDP minus net exports – was weaker than the headline, increasing 0.7% on the quarter, reflecting the positive contribution from external demand. Domestic demand is barely growing – remember these are annualized rates, not q.q rates.

Below the hood, the pace of personal consumption expenditures slowed markedly, +0.1% in the second quarter compared to +2.1% in the first. Some of the drag to consumption will bounce back in the third quarter, as auto sales and the supply chain disruptions dissipate – durable goods decreased 4.4% over the quarter. On the bright side, real nonresidential fixed investment picked up 6.3% in the second quarter and tripling the pace seen in the first. Real net exports contributed a large 0.58% to the headline growth number, as real exports maintained a healthy pace and imports decelerated over the quarter.

Overall, I think that the story is pretty consistent with the details of the labor market: the economy is improving, but domestic demand is very weak.The US economy is increasingly likely to enter a ‘growth recession’ – sub-potential growth – in 2011. And as David Altig highlights, a growth recession is generally associated with an economic contraction.

On the revisions

The drop in Q1 2011 growth to 0.4% was certainly not expected. Much of it was due to a reclassification of domestic inventory build (adds to GDP) to imports (subtracts from GDP). But there’s a lot more.

Today’s estimates reflect the annual revisions of the US national accounts. The revisions date back to 2003, which show a deeper recession and a quicker rebound. We now know that GDP bottomed in the second quarter of 2009, after having fallen 5.1% since the fourth quarter of 2007. Previously, the cumulative drop in GDP was 4.1%. The recovery through Q1 2011 was slightly faster, 4.9% in the pre-revised data compared to 4.64% in the revised series. (Rdan….4.9% is correct figure)

(Rdan: revised chart to correct calculation error…8/1)

Broadly speaking, though, the revisions show that economic momentum is petering out on a 6-month/6-month annualized basis. In sum, nominal spending on consumption goods and services was revised downward by 307.8 billion dollars spanning the years 2008-2010, and nominal fixed investment spending dropped by 83.9 billion dollars compared to previous estimates. Government spending is proving to be less of a drag than previously thought (in nominal terms), having been revised 5 billion dollars higher compared to previous estimates over the same period.

On balance, the expected 2011 growth trajectory will struggle to top 2%, as a rather positive 2H 2011 of 3.0% and 3.5% in Q3 and Q4, respectively, would imply a 1.9% Y/Y pace for 2011 as a while. I seriously doubt we’ll get that trajectory in H2 2011 – we’ll have to see what economists now forecast – but the downside risk to the economy is pervasive. It’s not just Japan.

Rebecca Wilder

Small Business=Fraud, Countercyclical Planning, MMT, and Other Economics Catch-up

Note:This was going to be short pieces about things I missed during a week of illness. It turned into a Very Long Piece riffing on two posts from Capital Gains and Games. And that’s without even mentioning the bravura work Stan Collender is doing there: see, for instance, this note that a deficit reduction bill with tax increases is very possible if you just ignore John Boehner.

  1. Small Businesses exist in the United States solely as a vehicle for people to commit tax fraud more easily.

    I don’t see any other realistic conclusion from this piece by Pete Davis. He tries to hide it, putting an idiotic suggestion with an Order of Magnitude’s less value fist, and mostly got people in comments to talk about COLAs, because economists are stupid that way. But the big number—$2,900,000,000,000—remains the big number.

    The only proper conclusion from the entries after the first two would be that Pete Davis can’t do mathis very fond of negative-NPV solutions. You could conclude from this that Pete is really stupid, but we know better. Besides, Len Berman of Forbes already went there, concluding, “Pete, you know better, and you’re just enabling them.” The integrity of posters at CG&G doesn’t usually get questioned so directly in the mainstream.

  2. And there’s good reason for that. Andrew Samwick has argued for years that stealing from the Greenspan Commission’s “making Social Security solvent for future generations” fund, and I expect him to continue to do so, just as I will continue to argue that everything in the Greenspan Commission documents says that was not the idea. But Andrew has me worried—possibly in a good way—about his idea of how to combine economics and family:

    Actually, the government should budget the way families should. It’s just not clear that families actually do what they should. Both families and the government should budget countercyclically — their savings rates should be higher during periods of growth than during periods of economic decline, so that their consumption can remain steady across booms and busts. The problem that both the government and families are having today is that neither one saved enough during the most recent boom, and so both are having to cut back more than would be ideal during this protracted downturn.

    Now Andrew—who is younger and cuter than I—is starting to sound like the old man telling us to get off his lawn. Either that or he has just discovered that Lifecycle Theory of Economics doesn’t work so smoothly in reality as in the standard models. Or both. So it’s probably safest if I use that paragraph as a springboard to talk about Countercyclical Policy, Rational Expectations, and MMT (below the fold).

The glory of Accounting Identities is that they must be true; the truth of them, though, is that there are many ways to get there. (“What do you want it to be?” is not just a joke; see Point One above.) So let’s start from an Accounting Identity:

Y = C + I + G + NX

Now, Andrew might have argued—and I might have agree conceptually—that transfer payments such as Unemployment Insurance, Social Security, Disability Insurance payments, and Medicare/caid Prescription Drug Coverage should be counted as C, not G. But since Andrew insists that Social Security benefits can be cut without Social Security payments being reduced, he’s clearly treating those payments as part of G, not C.* So I will too.

Now, MMT people—as I think of them, the ones who make certain that only Kevin McHale can “spike” the punchbowl**—argue for Nominal GDP targeting. This would keep the overall risk-free rate (r) relatively stable*** since the components of r combined— π + ie —pretty much has to equal “5” at all times.

Given that, the expectation should that the nominal Yt+1 should equal about 1.05Yt on an annual basis.

Several of you are looking up and saying, “Nu?” So let’s go back, then, to Andrew’s “all should budget countercyclically” claim and see what happens in a stable-NGDP, possibly-MMT, world.****

Let’s make one more assumption (not necessary, just easier for maths): at stable equilibrium,***** π and ie are both equal to 2.5: that is, 2.5% growth, 2.5% inflation. So, all else equal, half of the return on savings is going to be taken by inflation and half of the cost of debt is inflation. In an environment with no tax distortions and in which all lending is done sensibly and prudently (I’d like a pony, too), this is pure realisation of Modigliani-Miller: businesses should be indifferent between raising capital and borrowing, either of which is an Investment (I).

So assume that the growth rate for the economy—as a reminder, that’s the π portion—is expected to be three percent this year (it’s a good year). MMT would tell us that, to stay stable, we have to reduce inflation expectations to 2%. This means draining money from the system to reduce Isl (supply of loans) in the financial system.

(As noted above, at equilibrium, there is just enough loan money to go around. Since this is above equilibrium, profits will be reduced and businesses will have to raise I through capital, not loans.

Andrew would tell us that people in good times want to save more. This means that C should go down, relatively, which means that Isc (supply of capital) goes up.

Since—again, an identity—Is = Isc + Isl, MMT demands that personal savings rise to cover the tighter monetary policy. Just as Andrew wants. And just as is more possible in growth times than tight times.*******

So, ideally, I remains constant, if dIs = dIc. Not my favorite assumption, but a working one.

So far, in the boon environment, C is down and I is, at best, neutral. What about G?

Well, in Andrew-world, government is “saving for a rainy day.” Which means on balance that it’s trying to make more and spend less, just like the family. Which means there are two forces at work—(1) monetary policy, as the interest rate is tightened to control demand and/or reduce inflation, and either (2a) tax rates or (2b) spending cuts in some manner—that are working in the market.

I doubt 2a (tax increases) is the desired method of slowing growth (if you’re MMT-inclined) or stabilizing to equilibrium (which I assume to be Andrew’s goal). So let’s assume spending cuts.

Here those transfer payments come in. As the economy grows, UI costs are reduced. Let’s assume similar, smaller gains in other areas and stipulate that G declines in an above-equilibrium state due to a reduced need for spending—not “spending cuts” per se, but rather people being employed as growth comes.********* Best case scenario, fewer UI payments are made, debt is repurchased with those funds, future liabilities is reduced, and more revenue comes in as business expands—which is used to pay down debt so borrowing can be done more easily (read: at a relatively lower rate) during a downturn.

G declines. As Andrew would want, for good and proper reasons.

Which leaves NX. An expectation of 3% real growth is higher than the market had expected. Currency appreciates; exports become more expensive to buyers, who buy fewer. Imports become less expensive, relatively. dNX is negative (dX=0).

So with moderately higher growth, C, G, and NX all decline, while I either (a) increases slightly (in the absence of the need for and use of monetary policy, and not greater than C declines) or (b) declines (if monetary policy is used to reduce loan demand, since that pesky C0 rather ensures that dIsc |).

If you don’t use monetary policy to drain funds from the system, in which case (C + I) remains relatively stable or rises slightly, NX is more ambiguous (effectively=0), and G still realizes those spending cuts (paying down debt—more tax revenues at the same rate as business expands—which cet. par. increases the spread between r and equity investment and means some of that Is becomes Ic, but that’s a side discussion).

The implications here, and for a downturn example and the full cycle model, are left to the next post.

*This should make it clear that this point was not opened with an ad hominem attack, so anyone who suggests so in comments—even on the basis of “well, I didn’t read below the fold”—will see that comment deleted. Assuming, of course, that I read the comments on a regular basis, so you’re probably safe, if warned.

**Glee, not old NBA, reference.

***Still some uncertainty and timing issues, but a relatively flat but upward sloping yield curve would be a perpetual result.

***The coolest thing about working with everything in Nominal terms is that we can basically eschew calculus and natural logs. The worst thing about working with everything in Nominal terms is…

*****You’re driving down a dessert highway in a two-seater. By the side of the road, miles from the nearest water source, you see A Gorgeous Blond(e), Santa Claus, and an old, tired-looking Stable Equilibrium. Which one do you offer a ride?

A: The Gorgeous Blond(e). The other two are figments of your imagination.******

******Yes, think joke works better with “a brilliant violist.” But this is an economics blog, so live with it.

*******I would quibble Andrew’s statement that people borrowed too much for two reasons: one is that market transactions where the borrower is the one most subject to getting a poorer deal due to issues of asymmetric information hardly call to mind the borrower’s irrationality. Second is that many of those transactions were people “trading up” without clearly taking on a greater burden. (That is, $200K in equity on a NYC 1BR became a $200K down payment toward a home whose costs would be similar or lower, cet. par. The household balance sheet was not necessarily expanded on purchases. (That those purchases were at a higher direct cost than the available OERs is a separate, significant issue.) Similarly, HELOC borrowings that were invested into the property—all those effing marble kitchens for people who don’t know how to cook—are only negative to the balance sheet to the extent that they don’t have a reasonable ROI in the first place. That is, the deadweight loss is probably 30% or less on any portions of HELOCs that were used for Home Improvement projects.

Collaterally, if the HELOC was used in place of savings or 401(k) borrowings or other assets (for those who have same)—or even a higher-interest rate “bank” loan—as the method of buying a new car or other necessity, the fault lies not with the borrower, who made the rational (ex ante) choice to stay invested in “the market” and/or maintain Investments (savings).

In short, since all mortgages and HELOCs have been getting tarred with the same brush, we cannot be certain the extent to which “bad borrowing” was actually bad borrowing, or whether it was just borrowing based on the expectation that jobs and income would remain fairly stable—not drop the f*ck off the cliff and be reduced in even nominal terms for the survivors—concurrent with “investment” values dropping into an abyss.

Anyway, since C0 is still essentially constant (“sticky”) even as income first declines, it is intuitive that saving is easier (consider the effect on S = Income – [C0 + Cchoice] as Income approaches C0) in more prosperous times, on balance, for most of society, distributional effects being constant (or changing incrementally).

*********In such an environment, monetary policy may not be used so proactively. This should be fine for all, given that 5% NGDP is the target, not the absolute. Over time, it will smooth. I guess.

GDP – a disappointing report

Yesterday I addressed the weak high-frequency indicators, specifically with respect to leading indicators of investment spending on equipment and software (durable goods). I argued that Q2 has not started off well, given that the real core orders for capital goods are down compared to the January to March average.

The BEA reported that Q1 2011 growth was 1.8% on a seasonally-adjusted and annualized basis, which is unrevised from the first release but the composition of spending changed somewhat. On the margin, Q1 2011 looks a bit less stellar (if you can call 1.8% annualized growth ‘stellar’) with consumption growth being revised downward to 2.2% over the quarter (previously 2.7%). Below is an illustration of the Q1 2011 contributions to GDP growth before 8:30am (1.75%) and after 8:30am (1.84%).

I think that the story is pretty simple: higher gasoline prices is even worse for consumption than initially anticipated, and inventory accumulation remains a large driver of economic performance.

It’s still way to early to predict what the entirety of 2011 will bring – the IMF forecasts 2.8% annual growth – but the bar’s rising on the quarterly growth trajectory to attain that level of growth. I suspect that forecasts will be revised downward.

Although this is purely conjecture since the April figures are only recently rolling out, Q2 2011 growth is unlikely to be much better. Investment spending is already looking weak for April. And consumption growth may be lackluster on auto sales (H/T spencer) – durables consumption accounted for half of the quarterly growth rate in consumption (0.66% contribution to total GDP quarterly growth). Government spending is a drag, so it’s up to net exports!

Let’s look at what’s happened to the spending components of GDP during the ‘recovery’.

The chart illustrates the cumulative growth in the spending components of GDP (ex inventories). Exports and imports have bounced back on a strong rebound in international trade, 21% and 20%, respectively. Domestic spending is being driven largely by investment spending: consumption is 4% above it’s lows, while fixed investment spending is up 8% (of course, the decline was much larger). Government spending is broadly unchanged (-0.2%) since the outset of the recovery.

There’s much more to this report, like profits and wages, so I’ll revisit if time permits.

Rebecca Wilder

Durable goods orders: more evidence of near-term weakness in the US economy

They keep calling it a ‘soft patch’ in my business; but when’s the data going to show otherwise? This soft patch is persistent, and durable goods orders confirm it into Q2 2011.

Note: The ‘all manufacturing’ orders Y/Y growth rate are available through March only in Datastream for the chart above; the nondefense capital goods ex aircraft orders are current through Aptil.
READ MORE AFTER THE JUMP!From the Census April preliminary release on durable goods orders and shipments:

New orders for manufactured durable goods in April decreased $7.1 billion or 3.6 percent to $189.9 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 4.4 percent March increase. Excluding transportation, new orders decreased 1.5 percent. Excluding defense, new orders decreased 3.6 percent.

We know that the auto industrial production print was influenced by the supply chain disruptions stemming from the Japanese earthquake. This probably affected the durable goods orders and shipments as well. Furthermore, the big monthly drop was driven (partially) by a large 30% decline in nondefense aircraft and parts orders over the month.

But the gist of the report, in my view, was disappointing. Total durable goods shipments fell 1% over the month, while new orders plummeted 3.6%. This is a very volatile series, and the March growth in new orders was revised upward to 4.4% over the month from 2.5%; but the average growth rate in ‘core orders’ is showing holes.

Core durable goods orders, ‘nondefense capital goods excluding aircraft’ – a leading indicator of domestic investment spending on equipment and software – fell 2.6% over the month. Volatile, yes; but the real core goods orders turned negative, -0.33% on a 3-month average growth basis, furthering a downward trend that’s been in place since January 2011. The April figure was down 0.2% on a real basis compared to the January-March 2011 average – not a good start to Q2 2011.(The real series is constructed using the CPI durable goods deflator.)

The contributions to Q1 2011 fixed investment spending demonstrate that the entirety of fixed investment growth came from equipment and software, 0.8% quarterly contribution. (On data, you can view the contributions data in Table 2 of the release here or download the data for the entire report here.)

So when will this ‘soft patch’ end? Neil Soss today tells me that 2H 2011 will be quite the kicker, as the temporary supply chain disruptions to industrial activity wear off. We’ll see. It’s going to take quite a bit of growth in 2H 2011 to get the US back on track to the consensus 2011 growth forecast of 2.7% (according to Consensus Economics May report).

Rebecca Wilder

The Historical Relationship Between the Economy and the S&P 500, Part 1

by Mike Kimel

The Historical Relationship Between the Economy and the S&P 500, Part 1

This post is the first in a series on the historical relationship between the economy and the stock market. Data used in this post is the adjusted close of the S&P 500 going back to 1950 and quarterly nominal GDP going back to the same date. Because quarterly GDP figures measure the economy at the midpoint of the quarter, the S&P 500 for February, May, August and November are considered the analogous “quarterly” S&P 500 figures.

The following graph shows how the two series have evolved since 1950.

Figure 1

A simple eyeball test does indicate that historically, the two series have mostly moved together. And in fact, the correlation between the two series has been 93.5%, which is extremely high.

But which series has led and which has followed? For that, we look at the next graph:

Figure 2.

The black line shows the correlation between GDP and the S&P 500 x quarters hence, where x = 0, 1, … 24. In other words, it shows the correlation between GDP and the S&P 500 in the same period, the correlation between GDP and the S&P 500 lagged by a quarter, the correlation between GDP and the S&P 500 lagged two quarters, etc. As the black line shows, historically, GDP seems to have led the S&P 500 by about 16 quarters, or about four years; the correlation between GDP and the S&P 500 16 quarters out is about 94.1%. One possible reason… historically, when the economy grew, it encouraged more investment in corporations, but in many instances, investments take a long time (four years) to show up in ways that boost the market.

The red line looks at the relationship the other way – it looks at the correlation between the two series with the S&P 500 leading GDP. It shows that the correlation between the S&P 500 and the lagged GDP reached a peak of 95.2% when GDP was lagged by 10 quarters, or about two years. One possible explanation… historically, a growing stock market has made people feel wealthier, which in turn caused them to buy more stuff.

The conclusion from this… going back to 1950, GDP has led the S&P 500 and vice versa.

In the next post in this series, I’ll take a look at how this relationship has changed over time.
A few notes…
1. I’m not a financial advisor. I strongly suggest against making investments based on anything written above.
2. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at

The other measure of income, GDI, shows faster growth and an oversized profit contribution

There are two measures of income: the spending side (Gross Domestic Product, or GDP) and the income side (Gross Domestic Income, GDI). I’d like to see what GDI is telling us about the Y/Y recovery, since it’s a better predictor of turning points, according to FRB economist Jeremy J. Nalewaik.

The chart illustrates the contribution to Y/Y GDI growth coming from each of the main income components. (Click to enlarge.)The series is deflated using the GDP deflator, since the BEA only releases the nominal numbers. All references to GDP and GDI below refer to the real series.

Observations I note:

1. The Y/Y growth rate of GDI surpassed that of GDP in Q2 2010, continuing into Q3 2010. In Q3 2010, GDI grew at a 3.6% annual clip, while GDP marked a lesser 3.2% rate. Don’t know what this means, exactly; but it could imply that the economy is expanding more rapidly than the GDP measure would suggest.

(more after the jump)

2. The Q3 2010 corporate profit contribution to annual income growth, 2.2%, is overwhelming that from wages and salary accruals (labor income), 0.73%. This oversized contribution is rather remarkable, given that domestic corporate profits are just 8% of GDI, while that of wages and salaries is 55%. This will probably even out, though, as history shows a more balanced contribution between profits and wages.

3. The chart illustrates the ‘stickiness’ of labor income. The corporate profit contribution turned negative in Q4 2006, while that of wages and accruals turned negative in Q3 2008. That’s a near 2-yr lag from profits to wages. Wages are recovering now; but there will be further quarters of weak wage growth relative to profits, as claims remain elevated above the 350k mark.

4. The contribution to GDI growth from net interest payments is in negative territory. Low rates are dragging this component.

5. Supplements to wages and salaries – government transfer payments like unemployment insurance, for example – contributed 0.3% to annual GDI growth in Q3 2010. Interesting thing about this, is that the average contribution spanning the 2000-2004 period, 0.5%, outweighs that during the 2005-2010 period, 0.14%. I say interesting because the labor decline was far deeper in this cycle compared to the previous cycle. (See Calculated Risk chart from 12.3.2010)

Overall, the GDI report implies that the economy may be improving more quickly than the GDP report suggests. There’s plenty of room for improvement in this picture, however, as the labor wages remain stuck in the mud with corporate profits strong.

Tomorrow we’ll see the Q4 2010 GDP report – consensus forecast is for 3.5% Q/Q SAAR.

Rebecca Wilder

Math is Math: There Was No "Second Stimulus"

One of the best rules in mathematics is that, to determine the value of all the variables, you need only as many distinct equations as you have variables. (previous sentence edited for clarity.) So let’s combine a couple of recent articles (h/t Mark Thoma for the first, Digby for the second.)

Richard Florida finds three studies of State Government Spending Multipliers. The three studies find multipliers of 1.5, 1.7, and 2.12. Let’s be nice (in context) and use the lower one. StateMultiplier = 1.5

David Dayden notes that budget cuts in just two (large) states can be matched against the Fed’s “stimulus” monies. Let’s see how much, putting the best face possible on the data (i.e., taking the most optimistic projections). CADeficit (ignoring “reserve”): $26.4B (12.5 + 12 + 1.9). ILDeficit: $19B (13 + 6).

That gives us a CA-ILEconomyCost of (26.4 + 19)*1.5 = US$68.1B

The Federal Stimulus is $55-60B. Again, let’s be optimists and say $60B. The required multiplier is then:

FedMultiplier * FedStim = CA-ILEconomyCost

FedMultiplier * $60B = $68.1B

FedMultiplier = 1.135

That’s the minimum multiplier needed just to counter those two states. Add in Texas (whose shortfall appears to be on par with California’s, and is larger than Illinois)and you’re at 1.77.

Only 47 states to go.

The maximum multiplier needed just to solve the CA-IL gap is 1.71. Add in TX and you’re at 2.63 with 47 states to go.

The Right-Leaning Econ Bloggers (e.g., Tyler Cowen and Greg Mankiw; I apologize to the former for linking him to the latter) argued in 2008-2009 that Federal Stimulus has a multiplier of 1.3 or less.*

1.3 would put the economy at neutral if the multiplier is 1.7 (median estimate) and most but not all of the CA ambiguities break the wrong way.

And that’s just eliminating the effect of those two states. Add in TX and the multiplier goes to 2.64—rather close to Christina Romer’s 3.0 that was attacked continually by Mankiw et al.

Repeat after me: There was No “Second Stimulus.” If the economy is going to go into full recovery—i.e., can I have jobs with that?—it will have to be from Private Sector Investment, which has been (let’s be nice) on the sidelines so far,* and really doesn’t appear to be warming up to replace TARP.

*Strangely, this was not argued by them as an argument that the initial “stimulus” was too small for the even-then-obvious shortfalls in C and I; I can’t believe they thought MX was going to cover the difference, but that’s a side discussion, perhaps.

*We can quibble over whether that was and remains the correct decision. As has often been noted here, a lack of demand is not exactly an incentive to expand, unless you think that will be changing soon. A true recovery should have convinced firms that a change is gonna come.

A worthy debate

Econospeak’s Peter Dorman has an excellent debate going on with Sandwichman and cian, among others, about using GDP as a main measure of a healthy economy, the components of growing the economy, and the state of mainstream political economic discourse. We have touched on related issues on Angry Bear. Our own Rusty puts the question in literal and layman’s terms. It is a theme that would be worth pursuing here I believe.