The Economy and Discretionary Spending
Since the Q2 GDP numbers are to be announced tomorrow, I thought it would be appropriate to write something on the economy. Many are wondering when the economy will be coming back to pre recession levels. I gave this some thought and when you look at the math, it looks dismal. Let’s take an analytical look at it.
First, let’s begin with the Consumer. The Consumer has been responsible for 70% of the spending in the country. The other 30% comes from the Business community buying from each other. Since nominal GDP (Gross Domestic Product) of the United States was $14.2 Trillion dollars in 2009. Assuming the Consumer contribution, of 70%, that comes to $9.94 Trillion dollars. Ok, now let’s assume that even though the numbers I presented are for 2009, let’s assume there was no recession that year. (The reason I say that was because the nominal GDP for 2007 was $13.8 Trillion dollars, not far off from 2009.)
The Unemployment rate in 2007 was only 4.6%, while today it is 9.5-9.7%, and was as high as nearly 20%, if one counts those not collecting benefits and have given up looking for work. There are about 237 Million people in the Civilian non-institutional population and the Civilian Labor Force has about 153 Million people. The officially unemployed total about 15 million people.
In 2006, total discretionary income totaled $1.7 Trillion dollars in 2006. Nearly 78% of all discretionary income is held by households earning more than $100,000. “While the percentage of households with discretionary income has risen over the past several years, purchasing power remains concentrated in the wallets of the affluent,” said Lynn Franco, director of The Conference Board Consumer Research Center.
So if you take approximately $10 Trillion spent by Consumers, and then figure in the unemployment rate of approximately 10%, you have about $1Trillion less dollars for Consumers to spend. Add in the fact that 78% of all discretionary spending is from households earning more than $100,000, and it is even a higher number than $1 Trillion. That doesn’t include the businesses that don’t have money to spend buying other’s equipment, which represents the 30% of spending done by business. There could be another $1 Trillion less spending by business. That’s a huge hit on the economy.
If you put the $2+ Trillion out of the economy and then add in the Governments $0.8 Trillion Stimulus package, you can see we still are a long way off to making up the difference. As long as we continue to have 9-10% Unemployment rate and higher real Unemployment, we will not come out of this mess anytime soon. This implies to me not to believe the stock market will continue to rise. As a matter of fact, when these inferences become more recognized as truth, the markets will sell off. We will know by September/October this year whether that plays out. Oh, and by the way, conveniently, this is just before the November mid term election, where the Republican Party hopes to make much gains and take over the Congress. It will be the time when Democrats are most vulnerable.
Also, I found this link to the Great Depression from a Historical perspective. Check it out and learn what a Depression is really like. Not many living today have any experiences living in Depression times. David Rosenberg, formerly Chief Economist at Merrill Lynch, said this week that we are not in a recession, we are now in a Depression!
I also have a book I enjoy reading about the Great Depression. It is titled, “Only Yesterday and Since Today”. It was written by Frederick Lewis Allen originally in 1931 for Volume 1 and then 1940 for Volume 2, as there are two Volumes in the one book. They did an update of the book in 1986.
The other book I read is titled “The Worst Hard Times” by Timothy Eagan, a NY Times national enterprise reporter. The book was on the NY Times Notable Book list. The author is a Pulitzer Prize winner and has written 4 books. This book is about those who survived the Great American Dust Bowl. It shows the determination of Americans in the worst hard times imaginable. We were once a tough, proud people who were civil to one another even in desperate times. Look at us today.
First, let’s begin with the Consumer. The Consumer has been responsible for 70% of the spending in the country. The other 30% comes from the Business community buying from each other. Since nominal GDP (Gross Domestic Product) of the United States was $14.2 Trillion dollars in 2009. Assuming the Consumer contribution, of 70%, that comes to $9.94 Trillion dollars. Ok, now let’s assume that even though the numbers I presented are for 2009, let’s assume there was no recession that year. (The reason I say that was because the nominal GDP for 2007 was $13.8 Trillion dollars, not far off from 2009.)
The Unemployment rate in 2007 was only 4.6%, while today it is 9.5-9.7%, and was as high as nearly 20%, if one counts those not collecting benefits and have given up looking for work. There are about 237 Million people in the Civilian non-institutional population and the Civilian Labor Force has about 153 Million people. The officially unemployed total about 15 million people.
In 2006, total discretionary income totaled $1.7 Trillion dollars in 2006. Nearly 78% of all discretionary income is held by households earning more than $100,000. “While the percentage of households with discretionary income has risen over the past several years, purchasing power remains concentrated in the wallets of the affluent,” said Lynn Franco, director of The Conference Board Consumer Research Center.
So if you take approximately $10 Trillion spent by Consumers, and then figure in the unemployment rate of approximately 10%, you have about $1Trillion less dollars for Consumers to spend. Add in the fact that 78% of all discretionary spending is from households earning more than $100,000, and it is even a higher number than $1 Trillion. That doesn’t include the businesses that don’t have money to spend buying other’s equipment, which represents the 30% of spending done by business. There could be another $1 Trillion less spending by business. That’s a huge hit on the economy.
If you put the $2+ Trillion out of the economy and then add in the Governments $0.8 Trillion Stimulus package, you can see we still are a long way off to making up the difference. As long as we continue to have 9-10% Unemployment rate and higher real Unemployment, we will not come out of this mess anytime soon. This implies to me not to believe the stock market will continue to rise. As a matter of fact, when these inferences become more recognized as truth, the markets will sell off. We will know by September/October this year whether that plays out. Oh, and by the way, conveniently, this is just before the November mid term election, where the Republican Party hopes to make much gains and take over the Congress. It will be the time when Democrats are most vulnerable.
Also, I found this link to the Great Depression from a Historical perspective. Check it out and learn what a Depression is really like. Not many living today have any experiences living in Depression times. David Rosenberg, formerly Chief Economist at Merrill Lynch, said this week that we are not in a recession, we are now in a Depression!
I also have a book I enjoy reading about the Great Depression. It is titled, “Only Yesterday and Since Today”. It was written by Frederick Lewis Allen originally in 1931 for Volume 1 and then 1940 for Volume 2, as there are two Volumes in the one book. They did an update of the book in 1986.
The other book I read is titled “The Worst Hard Times” by Timothy Eagan, a NY Times national enterprise reporter. The book was on the NY Times Notable Book list. The author is a Pulitzer Prize winner and has written 4 books. This book is about those who survived the Great American Dust Bowl. It shows the determination of Americans in the worst hard times imaginable. We were once a tough, proud people who were civil to one another even in desperate times. Look at us today.
Labels: Consumer Spending, discretionary spending, economy, GDP, Great Depression
posted by Charles Amico at 8:53 AM
4 Comments:
Charles,
Thanks again for all your thoughts, including the sensitive ones bemoaning the current insanity in conservative politics. I am not sanguine, even well beyond the economic realm. The people of Earth seem to be suffering under some malevolent astral influence, as huge swaths of the malleable are showing clear signs of a hysterical insanity. I am wondering if we will escape with "merely" an economic repercussion, and not the too-oft-repeated in human history "second amendment" remedies to our cosmic unconsciousness. As a race, we seem incapable of learning from our history.
I still own Beacon, and am so sad to see the stock hit levels not seen since I first bought it perhaps a decade ago or more. Such a great company, and yet nobody seems to want the stock. Did Goldman buy 6% just in order to "play" it ? It's way below where they bought in (assuming it was not them dumping it today). Gene Hunt is on vacation, as his own investment sinks ever lower....
Obama is clearly the most intelligent, most civilized and even the most "christian" (with a small "c") president - nay, politician - in my lifetime, a lifetime that has seen my parents weep when Adlai lost, and that now has me viewing Ike as a prophetic and quite rational leader.
Do you think my TZA buy-in at about (current) $58 will ever allow me to sell at a profit ? Will Beacon ever finish their 20 mw plant, not to mention the second and third that are in the offing ?
Tune in tomorrow, same time, same station, to see if my future will be bright, or if I will have to slave away for the rest of my life just to pay the rent.
And, again, thanks for your posts.
- Jerry Wechsler (Minneloushe)
ps. What happened to the forum ? Are you still in communication with Gesh at all ?
Thanks for your comments, Jerry. Yes, I am still in touch with Gesh. You might be interested in anew site those VTSS investors started again. Here is the link:
http://www.vtssinvestor.com/
I do think your TZA will make a profit from your $58 price. And so will mine. :) I just bought some shares of TZA this week at $36.50, but BCON is another sad story.
Keep reading here as I post often and some you will like. If you haven't seen my recent one on Where are the Adults, you should. I wrote it within the last week.
Charles,
So you think BCON is dead ? That would be terrible, because pretty much my entire life savings is invested in that. I can wait a few years, of course, but I hope they don't just go bankrupt or get bought out for 40 cents. It is truly terrible, because the product is great, always works, and is supported by significant government grants and loans.
What do you think of the Pimco Bond Fund these days? I know Morningstart likes it, but do you expect the economy over the next quarter or the next year to prove beneficial to owners ?
I just changed my 401k into 50% money market and 50% Pimco Core Plus Bond Fund. Should I put it all in money market ? That just pays something like 3%, pretty much nothing (unless other things LOSE !).
I do read your posts, as well as Krugman, and sometimes articles by Stiglitz and Roubini - also Barry Ritholtz (The Big Picture blog). I look at John Mauldin, who seems knowledgable but always blames the Democrats for everything, so I get very tired of him.
Have a great week and fine Labor Day weekend; we will be taking our daughter Hye-Young back to school at Bennington.
I noted that the forum you linked to is only VTSS, which I do not own - I only have BCON.
Kind regards also to your talented wife.
jw
Sorry Jerry. BCON didn't have enough cash to build out and have had to borrow constantly and dilute their stock shares. The Technology of Flywheels is good, it's the business model that was flawed from the very beginning, as it turns out. They still don't have the NY plant built.
Glad you read my stuff. I just posted today 8/28 something you will want to read.
I can't advise you Jerry as to what you should do. I am not a Professional nor am I certified. You need to meet with a Financial Planner and ask their thoughts based upon your age, Assets and income potential going forward. Sorry for that but I just don't want to manage other peoples interests when it comes to the market. I can tell you what I have done though. I have a lot of Short positions, I have sold some stock and gone to raise cash levels and am hunkering down. Again, read today's post to see my reasoning.
Good luck Jerry.
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