US Consumers: Les Misérables? On Friday, September 9, Hillary Clinton certainly stirred up a hornet’s nest of controversy when she declared, “To just be grossly generalistic, you can put half of Trump supporters into what I call the basket of deplorables. Right? Racist, sexist, homophobic, xenophobic, Islamaphobic, you name it.” She added: “And unfortunately, there are people like that, and he has lifted them up. He has given voice to their websites that used to only have 11,000 people, now have 11 million. He tweets and retweets offensive, hateful, mean-spirited rhetoric.” She said all that at a LGBT gala for her in NYC.
The following day, Clinton expressed “regret” for her comments in which she said “half” of Donald Trump’s supporters are “deplorables.” In other words, many of them are still deplorable, but she won’t estimate how many of them are afflicted with this character flaw. I guess that could mean either less than half or more than half. Quite a few are starting to identify themselves as such by purchasing T-shirts and other items at Google’s Basket of Deplorables and other online stores.
This past Friday, at a Miami rally, Trump walked onstage to the theme song of the popular musical “Les Misérables,” sending the crowd into a frenzy. “Welcome to all you deplorables!,” Trump told the audience, prompting roaring applause. Trump believes that his supporters are “Les Mis.” On Thursday, July 21, in his acceptance speech at the Republican National Convention in Cleveland, he bemoaned the stagnant standard of living in the US, saying “Household incomes are down more than $4,000 since the year 2000.”
This is a widely believed urban legend. The statement is true, but it is based on flawed data. To paraphrase Daniel Patrick Moynihan, “Everyone is entitled to their own data, but they are not entitled to their own facts.” Melissa and I have analyzed the data that Trump referenced, and have come up with different factual conclusions. The data were just updated last week. Let’s have a look:
(1) Unmentionables. Trump’s woebegone income measure is real median household income compiled by the Census Bureau. He was absolutely right in stating that it was down $4,000 (7.0%) from $57,790 during 2000 to $53,720 in 2014 (Fig. 1). Last week, data were released for 2015 showing a 5.2% increase for the year, the best gain in the history of the series going back to 1968. Trump has yet to mention this development. However, he could observe that the 2015 figure was 2.4% below 1999’s record high, confirming the stagnation of the standard of living.
Then again, if he wants to stick with the facts, he should also mention that real median and mean family incomes rose to record highs last year, as did real mean household income.
(2) Notables. However, even these happy data series seriously understate the improvement in the standard of living since 2000. That’s because these Census measures of income are limited to pre-tax money income, so they exclude entitlement benefits such as Medicaid, Medicare, food stamps, and the earned-income tax credit. They also are based on limited micro data, e.g., surveys, rather than much more comprehensive payroll and tax return macro data.
A much better measure is personal income, which is compiled monthly by the Bureau of Economic Analysis. We can compare it to the Census measure by multiplying the Census current-dollar mean household income series by the number of households (Fig. 2). The divergence between the two alternative measures of aggregate nominal income is notable. During 2015, personal income totaled $15.5 trillion, while money income totaled $9.3 trillion–a difference of $6.2 trillion! The ratio of the latter to the former has declined from 0.72 at the start of the data in 1968 to only 0.60 in 2015 (Fig. 3).
(3) Commendables. There’s no official data series for median personal income per household. So we can only compare the averages of personal income and money income, both deflated by the personal consumption expenditures deflator (Fig. 4). Since 2000, the former is up 18.8%, while the latter is up just 5.3%.
The performance of real mean personal income per household is commendable. But might it have been skewed higher by the small percentage of the rich who have gotten much richer? (The rich disproportionately benefit from capital gains, which are not included in either income measure.) We doubt that there are enough rich to skew the data significantly. In any event, no matter how much they spend, it’s extremely unlikely that they have contributed significantly and disproportionately to the 20% increase in real consumption per household from 2000 through 2015 (Fig. 5).
Also at a record high during June were both nominal and real retail sales per household (Fig. 6). The latter is up 36% since the start of 2000 to $45,840 during June. Although retail sales declined during August, it was strong during the previous two months. As a result, the three-month average growth rate in real retail sales was 4.5% through August, as Debbie reports below (Fig. 7).
By the way, while we are on the subject of retail sales, online shopping accounted for a record 28.1% of online and in-store GAFO spending during July (Fig. 8). Americans’ online spending rose to a record $493 billion (saar) during July (Fig. 9).
(4) Comfortables. Debbie and I generate our Consumer Optimism Indexes (COI) by averaging the monthly data from the Consumer Sentiment Index and the Consumer Confidence Index (Fig. 10). The overall COI is back at previous cyclical highs. Apparently, Les Mis aren’t very miserable. Americans have never been as well off as they are today, and they are relatively optimistic.
US Ruling Elite: Untouchables? There’s no evidence or reason to believe that Trump’s supporters are more miserable than Clinton’s supporters. So if they are not as miserable as widely believed, why are they so angry? In my opinion, they are mad at the ruling elite in both the Democratic and Republican parties. These political potentates share the deplorable view that they know what is good for the people, even if the people don’t agree. In other words, the people view the political elite as deplorably out of touch with their needs and aspirations. Hillary Clinton’s “basket of deplorables” comment was widely viewed as equivalent to Mitt Romney’s detestable comments of May 17, 2012:
“There are 47 percent of the people who will vote for the president no matter what,” Romney said, according to the video leaked to the liberal magazine Mother Jones. “All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That’s an entitlement. And the government should give it to them. And they will vote for this president no matter what.
“And I mean the president starts out with 48, 49 percent … he starts off with a huge number,” Romney continued. “These are people who pay no income tax. Forty-seven percent of Americans pay no income tax. So our message of low taxes doesn’t connect. So he’ll be out there talking about tax cuts for the rich. I mean, that’s what they sell every four years. And so my job is not to worry about those people. I’ll never convince them that they should take personal responsibility and care for their lives. What I have to do is convince the five to 10 percent in the center that are independents, that are thoughtful.”
In other words, both Clinton and Romney believe that wide swaths of the country’s citizens are out of touch with their own elitist views. So these unwashed masses must be helpless, hopeless, and just plain stupid. It’s one thing to attack the 1%, but to attack as much as 50% of the potential voting public is just dumb … and elitist.
By the way, PolitiFact looked at the data behind Romney’s assertion and came up with different facts: “Obama gets substantial support from people earning more than $50,000–and 90 percent of them, or more, do pay taxes. And Romney gets lots of support from seniors, many of whom have no income tax liability. We rate the claim False.”
Stocks: Who Is the Least Deplorable? We can all agree on the following fact: Most Americans seem to believe that the two leading candidates running in the presidential race are deplorable. They both have the highest unfavorable ratings of any two previous candidates for the job. In other words, the one who is deemed to be least deplorable and despicable will be our next President.
I’ve suggested that based on my conversations with our accounts, my sense is that they believe that stocks will do better if Hillary Clinton wins because she represents the status quo, which has been bullish for stocks since March 2009. Of course, that’s just an informal and very small survey.
Even with the benefit of hindsight, we’ll never know which one of the candidates would have been more bullish or bearish. The question is whether, given what we know, might Donald Trump be better for stocks even though he represents anything but the status quo?
Stocks rebounded on Monday 9/12 from the Friday 9/9 plunge after Hillary Clinton stumbled during the 9/11 ceremonies at Ground Zero. Might traders have positioned for Hillary to drop out of the race and be replaced with a Democratic alternative (like Joe Biden) who could beat the Donald? As Hillary recovered last week, the market slipped again.
In other words, last week’s action didn’t give us much guidance on the market’s political preference. However, many conservatives gave Donald Trump high marks for hisspeech on Thursday, September 15, when he discussed his economic program. It must have reminded them of Ronald Reagan’s economic policies, which were favorably greeted by stock investors. Consider the following:
(1) Taxes. There are lots of Reagan-style policies outlined in the speech. First and foremost are lower tax rates and tax simplification. More specifically, Trump proposes to reduce the number of tax brackets from seven to three, i.e., 12%, 25%, and 33%. He added that “millions and millions” of low-income Americans will pay no income tax at all, though that’s already the case–the half of the population that Romney took aim at back in 2012.
Trump vaguely promised to cap deductions for the wealthy and close special-interest loopholes. Getting Congress to enact specific measures for doing so won’t be easy. However, there will be a new deduction for the average cost of childcare, including for stay-at-home parents. Furthermore, the business tax rate would be slashed from 35% to 15%. In addition, the tax on repatriated earnings would be cut to 10%.
(2) Regulation. The influence of Trump’s supply-side economic advisers is also reflected in his proposals for regulatory relief: “I’ve proposed a moratorium on new federal regulations that are not compelled by Congress or public safety, and I will eliminate all needless and job-killing regulations now on the books. This includes eliminating some of our most intrusive regulations, like the Waters of The U.S. Rule. It also means scrapping the EPA’s so-called Clean Power Plan which the government itself estimates will cost $7.2 billion a year. This Obama-Clinton directive will shut down most, if not all, coal-powered electricity plans in America. Remember what Hillary Clinton said? She wants to shut down the miners, just like she wants to shut down the steel mills.”
(3) Energy. Without providing any specifics, Trump pledged to “lift restrictions on all sources of American energy production.” It’s not clear which he can lift using the President’s executive powers and which would require the cooperation of Congress.
(4) Trade. Trump blamed China for the slowdown in US economic growth, observing that real GDP rose 3.5% per year on average following WWII through 2000. Then China joined the World Trade Organization at the end of 2001, and US growth slowed to 2.0%. Seeing causality in that coincidence is certainly debatable. Nevertheless, Trump is convinced that bad trade deals have hurt US workers. He repeated his claim that “households are making less today than they were in the year 2000.” He intends to renegotiate NAFTA, to keep the US out of the Trans-Pacific Partnership, and to label China a currency manipulator. He will also “apply tariffs to any country that devalues its currency to gain an unfair advantage over the United States.”
(5) Infrastructure. Interestingly, while he mentioned infrastructure spending a few times, he did so in passing, with no indication of any specific program or proposals. Near the end of his speech, though, he said, “We will rebuild our roads, bridges, tunnels, highways, airports, schools and hospitals.”
(6) Bottom line. This plan seems too good to be true. For starters, Trump has to stay with the script, which is not his style. Congress gets the final say on his proposals for cutting taxes and capping deductions and loopholes. Trump certainly won’t get any cooperation from Democrats, and even Republicans may resist his pushy and politically incorrect style. His tough measures on trade could backfire if they lead to a proliferation of protectionism. Ironically, we may need construction workers from Mexico to rebuild our infrastructure, including the wall to keep them out.
In any case, Trump certainly laid out a more sweeping and specific economic plan than anything presented by Clinton so far. While the status quo has been bullish under Obama, it won’t necessarily be so under Clinton. The bottom line is that stock investors might conclude that a reprise of Reaganomics might be better than four more years of Obamanomics, i.e., higher taxes, more regulation, and large budget deficits.
US Corporations: Irresponsibles? Debbie and I are working through the Fed’s latest quarterly Financial Accounts of the United States, which was updated through Q2 at the end of last week. The data on nonfinancial corporations (NFCs) belie the widespread view that they are borrowing too much and using too much of their profits to buy back their shares. Their critics, particularly Progressive politicians and academics, say they should be using more of their financial resources to expand their capital, increase productivity, and pay their workers more. Here’s what the Fed’s data show:
(1) Capital spending & cash flow. Data since Q3-1952 show that NFCs’ expenditures on capital and inventories closely tracked their cash flow (Fig. 11). However, the “financing gap” has been showing a much greater surplus during the current economic expansion than in the past (Fig. 12).
Doesn’t that prove that NFCs have been underinvesting? Why aren’t they spending all of their cash flow on capital? It really doesn’t prove anything. Capital spending is pro-cyclical, i.e., it coincides with the business cycle. This capital-spending cycle has been comparable to the previous two in amplitude and duration (Fig. 13). We don’t know of any major industry that hasn’t been spending enough to remain efficient and competitive. We know of plenty of industries that have excess capacity on a global basis and not enough demand growth to drive productivity.
(2) Bond issuance and equity buybacks. The pace of NFC net bond issuance has reached a record high during the current economic expansion (Fig. 14). The pace of NFC equity buybacks is approaching the peak of the previous cycle. Nevertheless, relative to cash flow, bond issuance has been relatively small (Fig. 15).
(3) Dividends. Meanwhile, nothing unusual is happening on the dividend front. NFCs have a tendency to pay more than 50% of their after-tax profits in dividends (Fig. 16). They’ve been doing so during the current economic expansion.
Movie. “Snowden” (+) (link) is a docudrama about Edward Snowden, the spy/traitor/patriot who blew the whistle on the NSA’s intelligence-gathering methods. They amounted to a search engine that was set loose to collect information on everyone on the planet, including any American with any digital information. I expected to dislike the movie because it was directed and written by Oliver Stone, who is a leftwinger obsessed with rightwing conspiracy theories. However, while the movie didn’t address the damage done by Snowden, it did convincingly make the case that the government went too far, threatening the right to privacy of innocent citizens. That was confirmed by subsequent legislation passed by Congress to rein in the NSA’s fact-gathering operations. My hunch is that despite Snowden’s efforts, official and unofficial hackers continue to create ever-growing dossiers on all of us.