Thursday, June 27, 2013

And right on cue ...

- by New Deal democrat

Yesterday I warned against wage and income comparisons made between the last quarter of 2012 and the first quarter of 2013. Because of the "fiscal cliff" and the general expectation that some if not all of the Bush tax cuts were going to expire at the start of this year, lots of compensation that would have been paid in the first quarter of this year was moved forward into the last quarter of last year. In fact, when you averge the two quarters together, by the end of the first quarter of this year, real wages and real income were at new highs. But cherry-picking the quarter over quarter comparisons is making for lots of Doomer nonsense.

So I was cruising the progressive blogosphere to see if anyone had yet noticed the likley negative impact of the Fed taper, when lo and behold, somebody finally did. Kudos to him for doing so, and by and large I agree with his opening few paragraphs. But because it is getting lots of hits, because it does fall into several Doomer traps, and because I know many of our readers read there also, let me set the record straight.

Here's the several paragraphs I disagree with:
The fact that [personal consumption expenditures][are] lower than [they were during the height of the 2008-09 panic should give people some cause for concern.

The explanation for this crash in spending can be found here:
Real per capita disposable incomes took yet another hit. The astonishing annualized contraction of real per capita disposable income has now reached -9.21%....
Quantitative easing's function is to make it easier to borrow, thus increasing the level of debt in the economy and the amount of deflationary forces.

Ummm, no.

The first mistake is that personal consumption isn't lower than it was during the last recession. It has been consistently rising.

The writer uses this same graph but showing YoY% changes, i.e., personal consumption expenditures aren't "crashing" at all, merely improving at a decelerating rate.

The second mistake is the same mistake we saw with regard to real wages yesterday: citing the decline in the first quarter without reference to the even bigger increase in Q4 2013. Here's real per capita discposable income for the last ten years, measured monthly (red) and quarterly (blue) (Note that since the second quarter isn't finished, there is no measurement for this quarter, although April and May are shown on the monthly data):

Real per capita disposable income is actually higher in April and May than it has ever been since the recession, with the exception of the November and December spike. The "astonishing annualized contraction" is nonsense. It only exists in comparion with the "astonishing annualized rise" in the same metric in 4Q 2012.

The final mistake is that households haven't increased their debt at all. Consumer debt is down about 14% from its peak a few years ago, and the household debt burden is at its lowest rate, ex one quarter, since the series was started over 30 years ago:

And it isn't just the ratio of debt payment to income, the total amount of debt payments, per capita, adjusted for inflation, is also down about 14% since its peak in the last recession:

Whatever other flaws it may have, quantitative easing has allowed households to refinance debt, or pay down debt, and considerably lower interest rates. The problem with the "taper" is that if it causes a sustained risse in intereest rates, that source of oxygen to the consumer will be shut off. Since no significant improvement in real wages looks likely soon, that could cause a recession (but probably not for another year or even two) and with that might come real wage deflation. That is my biggest longer term fear.

So, although the writer gets lost along the way - i.e., things are by no means "crashing" now - I think he winds up at the correct destination.