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Steven Hansen
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Steven Hansen is an international business and industrial consultant specializing in turning around troubled business units; consults to governments to optimize process flows; and provides economic indicator analysis based on unadjusted data and process limitations.
My company:
Econintersect LLC
My blog:
Global Economic Intersect
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  • The Average American Still Is Not Doing That Well

    We have modelled the median American who we call Joe Sixpack. To begin, one needs to define Joe Sixpack. Urban dictionary defines Joe:

    Average American moron, IQ 60, drinking beer, watching baseball and CNN, and believes everything his President says.

    Too many of us think we are smarter than Joe - and are above Joe in the social order. But many of us are Joe. Per Wikipedia:

    John Q. Public (and several similar names; see the Variations section below) is a generic name in the United States to denote a hypothetical member of society deemed a "common man." He is presumed to represent the randomly selected "man on the street." Similar terms include John Q. Citizen and John Q. Taxpayer, or Jane Q. Public, Jane Q. Citizen, and Jane Q. Taxpayer for a woman. The name John Doe is used in a similar manner. For multiple people, Tom, Dick and Harry is often used. Roughly equivalent are the names Joe Six-pack, Joe Blow, the nowadays less popular Joe Doakes and Joe Shmoe ….

    Almost all Americans who MUST work to survive are Joes. Americans who are relying on some level of earned income during retirement are Joes. I believe many who see themselves as middle class (educated or not - professional or blue collar) is a Joe. Joe is somewhere around average American:

    • Joe's median family unit spends or makes about $50K per year
    • Joe's median net worth was $120K in 2007

    We specify by definition that over 50% of Americans are Joes.

    A Federal Reserve data release (Z.1 Flow of Funds) for 3Q2014 - which provides insight into the finances of the average household - shows a marginal decline in average household net worth. Our modeled "Joe Sixpack" - who owns a house and has a job, and essentially no other asset - is also feeling poorer.

    You may ask why this analysis is important? It looks at the financial health of the consumer - and in a consumption based economy, it measures the dynamics affecting the consumer.

    What is concerning is that the 35% of Americans who have no home or assets are no better off (living from paycheck to paycheck) - and have no path to consume more. This person is not modeled by this index.

    First, from the Z.1 Flow of Funds report, what was shown about Household Net Worth and Growth of Domestic Nonfinancial Debt. Cumulative Household net worth declined marginally, while cumulative household debt grew.

    The Joe Sixpack Index

    The Joe Sixpack Index is a composite index of home prices and wage income (again - Joe owns a house, has a job, and no other assets). This index was designed to measure how rich Joe should feel. The theory is that the richer Joe feels, the more Joe will spend.

    • The data in this index is only updated every three months, and the data was updated with the release of the Federal Reserves Z.1 Flow of Funds.
    • It is inflation and population adjusted.
    • Currently, Joe has a house that is increasing in value at a slower pace - and his income in inflation terms grew marginally (but at a slower rate) - so the net affect is that the index has declined in 3Q2014 - and would indicate Joe is feeling poorer (blue line in graph below) - but at a slower rate than last quarter. If Joe is not feeling richer, it is unlikely spending can increase.
    Joe Sixpack Index (blue line, left axis) shown against GDP (red line, right axis)

    You can view the [entire post here] which includes a look at middle man who likely is an average white collar worker.

    Other Economic News this Week:

    The Econintersect Economic Index for December 2014 is showing our index on the high side of a tight growth range for almost a year. Although there are no warning flags in the data which is used to compile our forecast, there also is no signs that the rate of economic growth will improve. Additionally there are no warning signs in other leading indices that the economy is stalling - EXCEPT ECRI's Weekly Leading Index which is slightly below the zero growth line.

    The ECRI WLI growth index value crossed slightly into negative territory which implies the economy will not have grown six months from today.

    Current ECRI WLI Growth Index

    The market was expecting the weekly initial unemployment claims at 280,000 to 315,000 (consensus 295,000) vs the 294,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 299,000 (reported last week as 299,000) to 299,250. Rolling averages under 300,000 are excellent.

    Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line)

    (click to enlarge)

    /images/z unemployment.PNG

    Bankruptcies this Week: dELiA*s, Lithium Technology

    To view all of the analysis this week [click here].

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Dec 13 11:43 AM | Link | Comment!
  • Consumer Credit Continues To Slow

    Consumer credit growth has been trending down down after peaking in July. Even with the backward revisions of data by the Federal Reserve changing trends, this particular trend has been in play for two months now. In any event, year-over-year growth (ignoring student loans) is still growing at double the rate of consumer contribution to GDP growth.

    The Federal Reserve's headline said:

    In October, consumer credit increased at a seasonally adjusted annual rate of 5 percent. Revolving credit increased at an annual rate of 1-1/4 percent, while nonrevolving credit increased at an annual rate of 6-1/4 percent.

    Econintersect's view:

    Unadjusted Consumer Credit Outstanding
     Month- over- Month GrowthYear- over- Year GrowthMonth- over- Month Growth without Student LoansYear- over- Year Growth without Student Loans
    Total-0.2%+6.7%-0.2%+4.0%
    Revolving-0.2%+3.2%n/an/a
    Non- Revolving-0.1%+8.0%-0.2%+4.4%

    Overall takeaways from this month's data:

    • Student loan growth has been decelerating gradually for the last 2 years;
    • Student loans had little effect on Non-revolving credit growth as the data decelerated whether student loans were considered or not - and revolving credit (credit cards and has no student loans) has been slightly accelerating for the last 5 months;
    • The backward revision this month as usual was significant enough to distort how one views the short term trends.

    The market expected consumer credit to expand $12.0 to $20.0 billion (consensus = $16.8 billion) versus the seasonally adjusted headline expansion of $13.2 billion reported.

    Note that this consumer credit data series does not include mortgages.

    The Econintersect analysis is different than the Fed's:

    • an effort is made to segregate student loans from consumer credit to see the underlying dynamics;
    • this analysis expresses growth as year-over-year change, not one month's change being projected as an annual change - which creates a lot of volatility and distortion.
    • where our analysis expresses the change as month-over-month, month-over-month change is determined by subtracting the previous month's year-over-year improvement from the current month's year-over-year improvement.

    The commonality between the Fed and Econintersect analysis is that consumer credit is expanding whether one considers student loans or not. Econintersect does not believe the seasonal adjustment methods used in the headlines are accurately conveying the situation for a variety of reasons.

    This month student loans accounted for 61% of the growth of total consumer credit. Since the Great Recession, much of the increase in consumer credit had been from student loans. The following graph shows the flow into consumer credit including student loans (blue line) against the flow into student loans alone (red line).

    Flow of Funds into Consumer Credit - Total Consumer Credit (blue line) vs Student Loans (red line)

    Another way to view the effects of student loans on consumer credit is to view the year-over-year growth in $ billions of student loans as a percent of total consumer credit (including student loans). In short, student loans accounted for all consumer credit growth from 2009 to late 2011. Currently, the growth of consumer credit (blue line in graph below) is showing growth.

    Year-over-Year Growth in $ Billions - Total Consumer Credit (blue line) vs Student Loans (red line)

    Consider that student loans make up a large portion of assets of the Federal Government [from Econintersect contributor Doug Short]

    And one final look at total consumer credit and the effect of student loans. The graph below removes student loans from total consumer credit outstanding.

    Total Consumer Credit Outstanding - Total Consumer Credit (blue line) vs Total Consumer Credit without Student Loans (red line)

    Econintersect spends time on this generally ignored data series because the USA is a consumer driven economy. One New Normal phenomenon has been the consumer shift from a credit towards an electronic payment (current account debit) society - a quantum shift which changes the amount of consumption. Watching consumer credit provides confirmation that this New Normal shift continues.

    The question on the table - is this just noise, a short term cycle, or a warning of things to come? To read the entire post on this subject [click here].

    Other Economic News this Week:

    The Econintersect Economic Index for December 2014 is showing our index on the high side of a tight growth range for almost a year. Although there are no warning flags in the data which is used to compile our forecast, there also is no signs that the rate of economic growth will improve. Additionally there are no warning signs in other leading indices that the economy is stalling - EXCEPT ECRI's Weekly Leading Index which is slightly below the zero growth line.

    The ECRI WLI growth index value crossed slightly into negative territory which implies the economy will not have grown six months from today.

    Current ECRI WLI Growth Index

    The market was expecting the weekly initial unemployment claims at 290,000 to 300,000 (consensus 295,000) vs the 297,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 294,250 (reported last week as 294,000) to 299,000. Rolling averages under 300,000 are excellent.

    Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line)

    (click to enlarge)

    /images/z unemployment.PNG

    Bankruptcies this Week: Republic of Singapore-based Bumi Investment Pte (Chapter 15), Privately-held Deb Stores Holding (aka Deb Shops), Privately-held American Laser Skincare (pka American Laser Centers and Bellus ALC Acquisition)

    To see a summary of all of our analysis this week [click here].

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Dec 06 5:26 AM | Link | Comment!
  • There Is No Evidence Personal Incomes And Expenditures Are Supporting Higher GDP

    In the previous week, The second estimate of second quarter 2014 Real Gross Domestic Product (NYSE:GDP) was revised up to 3.9%. This data point was +3.5% in the advance GDP estimate. The upward revision to the percent change in real GDP primarily reflected upward revisions to private inventory investment, to personal consumption expenditures (PCE), and to nonresidential fixed investment that were partly offset by a downward revision to exports and an upward revision to imports.

    I highlighted the words in the above paragraph. Then this week we get a relatively soft PCE. This noisy data series came in below expectations. However the news is not that bad as the year-over-year growth of income is growing faster than expenditures.

    • The market looks at current values (not real inflation adjusted) and was expecting:.
     Consensus RangeConsensusActual
    Personal Income - M/M change0.3 % to 0.5 %0.4 %0.2%
    Consumer Spending - M/M change0.2 % to 0.4 %0.3 %0.2%
    PCE Price Index -- M/M change-0.2 % to 0.1 %0.0 %0.1%
    Core PCE price index - M/M change0.1 % to 0.2 %0.2 %0.2%
    • In other words, both income and spending were slightly below expectations.
    • The monthly fluctuations are confusing. Looking at the inflation adjusted 3 month trend rate of growth, income trend is up and expenditures is marginally trending down.
    • Real Disposable Personal Income is up 2.5% year-over-year, and real personal expenditures is up 2.2% year-over-year (table 10).
    • this data is very noisy and as usual includes moderate backward revision (detailed below) - this month the changes were moderate.
    • The second estimate of 3Q2014 GDP indicated the economy was growing at 3.9% (quarter-over-quarter compounded). Expenditures are counted in GDP, and income is ignored as GDP measures the spending side of the economy. However, over periods of time - income and expenditure must grow at the same rate. Usually this differential signals a future slowdown of consumer spending growth.
    • The savings rate continues to be low historically, but improved this month.

    (click to enlarge)

    The inflation adjusted income and consumption are "chained", and headline GDP is inflation adjusted. This means the impact to GDP is best understood by looking at the chained numbers. Econintersect believes year-over-year trends are very revealing in understanding economic dynamics.

    Per capita inflation adjusted expenditure has exceeded the pre-recession peak.

    Seasonally and Inflation Adjusted Expenditure Per Capita

    Per capita inflation adjusted income is above pre-recession levels.

    Seasonally and Inflation Adjusted Income Per Capita

    Backward revisions this month:

    Estimates for personal income and DPI have been revised for April through September; estimates for PCE have been revised for July through September. Changes in personal income, in current-dollar and chained (2009) dollar DPI, and in current-dollar and chained (2009) dollar PCE for August and September -- revised and as published in last month's release -- are shown below.

    Estimates of wages and salaries were revised from April through September. The revision to second-quarter wages and salaries reflect the incorporation of the most recently available BLS tabulations of second-quarter wages and salaries from the quarterly census of employment and wages. Revised estimates for July, August, and September reflect extrapolation from the revised second-quarter level of wages. In addition, revisions to August and September reflect revised BLS employment, hours, and earnings data for those months.

    (click to enlarge)

    The graph below illustrates the relationship between income (DPI) and expenditures (PCE) - showing clearly income and expenditures grow at nearly the same rate over time. In dollar terms, incomes are now growing faster than consumer expenditures - and this is positive for long term economic growth (as future spending is being banked).

    Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Expenditures (red line)

    The long term trend remains that the consumer is spending more of its income - although the growth rate has been in a tight range for over one year.

    Seasonally Adjusted Spending's Ratio to Income (a declining ratio means consumer is spending less of its Income)

    PCE is the spending of consumers. In the USA, the consumer is the economy. Likewise, personal income is the money consumers earn to spend. Even though most analysts concentrate on personal expenditures because GDP is based on spending, increases in personal income allow consumers the option to spend more.

    There is a general correlation of PCE to GDP (PCE is a component of GDP). PCE is not very noisy compared to GDP, but subject at times to significant backward revision.

    Seasonally and Inflation Adjusted Year-over-Year Change of Personal Consumption Expenditures (blue line) to GDP (red line)

    Econintersect and GDP uses the inflation adjusted (chained) numbers. Disposable Personal Income (DPI) is the income after the taxes.

    Seasonally & Inflation Adjusted Percent Change From the Previous Month - Personal Disposable Income (red line) and Personal Consumption Expenditures (blue line)

    Yet year-over-year growth is not exceptional with both consumption and income near year-over-year GDP growth.

    Seasonally & Inflation Adjusted Year-over-Year Change - Personal Disposable Income (red line) and Personal Consumption Expenditures (blue line)

    FRED Graph

    The savings rate has been bouncing around - but the general trend is down. In an economy driven by consumers, a higher savings rate does not bode well for increased GDP. This is one reason GDP may not be a good single metric of economic activity. The question remains what is the optimal savings rate for the current demographics. It might be expected that as people near retirement, the savings rate rises and after people retire, savings rate falls. Econintersect is not aware of any study which documents this effect. The graph below is from BEA table 2.6. - and shows a significant fall in savings rate in January 2013 which has not been recovered - and now remains range bound. The savings rate is now 5.0% - last month was a revised 5.0%.

    Personal Savings as a Percentage of Disposable Personal Income

    So there you have it. Nothing is really suggests in this consumer income and spending data why it supported an increase in 3Q2014 GDP.

    Other Economic News this Week:

    The Econintersect Economic Index for December 2014 is showing our index on the high side of a tight growth range for almost a year. Although there are no warning flags in the data which is used to compile our forecast, there also is no signs that the rate of economic growth will improve. Additionally there are no warning signs in other leading indices that the economy is stalling - EXCEPT ECRI's Weekly Leading Index which is slightly below the zero growth line.

    The ECRI WLI growth index value crossed slightly into negative territory which implies the economy will not have grown six months from today.

    Current ECRI WLI Growth Index

    The market was expecting the weekly initial unemployment claims at 278,000 to 295,000 (consensus 286,000) vs the 313,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 287,750 (reported last week as 287,500) to 294,000. Rolling averages under 300,000 are excellent.

    Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line)

    (click to enlarge)

    Bankruptcies this Week: none

    Please [click here] to view all the economic and financial analysis this past week.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Nov 29 6:49 AM | Link | Comment!
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