Consumer demand makes up over 70% of US GDP. It is therefore by far the most important factor affecting economic growth. It should worry us then that real median household income peaked in 1999 and is now almost 10% bellow that peak.
There are other ways to measure income. For instance, we could refer to average household income instead, where we take into account the fabulous rate of income growth enjoyed by the top 10% or top 1% of earners. Fact is however that those who already have all their basic needs met will be less likely to contribute significantly to consumer demand growth because of the increase in wealth they are currently enjoying. It is obvious that the current long-term trend in real median household income, if it is to continue down the current path, will mean that eventually US consumer demand will stagnate. The only boost to consumption will come from an increase in the number of consumers due to population growth, which is about 1% per year.
The fact that there has been an overall downward trend in household incomes since 1999 already, yet consumer demand continued to increase at a relatively decent pace gave people a false sense of comfort. US prime interest rates going from an average of over 8% in 1999 to 3.25% currently may have had something to do with keeping the consumer going up to recently. The low interest rate boost was a one-time deal, because interest rates cannot go any lower from here; in fact, we can expect rates to very slowly and gently creep up in the coming years.
Gross output (GO) to the rescue.
Given that consumer spending makes up over 70% of US GDP, with government spending which makes up another 20% also under pressure, it would be logical to think that we should be looking at ways to address the problem. This year will be the year when we will see a solution to the problem, albeit not necessarily the right one, nor is it a materially relevant one. It is a solution meant to counter our increasingly negative perception of the situation.
Gross output will be a new measure of economic activity, released on a quarterly basis by the Bureau of Economic Analysis, which is already being hailed as a more accurate measure than GDP. The release of this measure will start in the spring and will relegate consumer spending as a proportion of the economy to about 40% from the current level of 70%.
This measure will count all the transactions involved in the production process of final goods, thus inflating the role of business investment in the economy. The more complex and specialized the production processes, the higher the gross output level. In other words, no actual economic growth needed in order to register perceived growth in the economy. We only need to see an increase in domestic trade in intermediary goods between firms. For this reason, I expect we will hear a lot about gross output in coming years, and we may even find that GDP will gradually be talked about much less, because it will become the inconvenient measure.
With average yearly US economic growth in the 1% range since 2008, I cannot really blame people for not wanting to talk about GDP anymore. Not talking about it, or talking about it less will not make the effects of a stagnated economy go away. It will only lead to complacency, fueled by a new measure of growth, designed to make the current reality seem somewhat better.
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