Trends in real per capita income

 - by New Deal democrat

In the last several weeks, I have done extensive research on trends in real, inflation adjusted Income per capita over the last 20 years, starting with 1993,  Translated from economics into regular english, what I have been looking at is how well each individual American, and also each individual *working* American fared in terms of income over that period.

Real personal income minus transfer payments (Social Security, etc.) is one of the 4 generally accepted markers for whether the economy is in a recession vs. an expansion.  Calculating per capita real personal income is easy, courtesy of the St. Louis FRED, and here it is (blue), and I've additionally shown personal income divided per capita only by the civilian labor force rather than by the population as a whole (red):

You can easily see that real per capita personal income rose sharply in the tech boom of the 1990s (up 24.2% from 1993 to 2000), stalled briefly during and after the 2001 recession (but never dipping below the 2000 level), and then rose more slowly  through 2007 (up 11.2% since 2000) before falling during the Great Recession, and then rising again to a new high in 2012 (up 12.2% since 2000).

In general, the civilian labor force tracked population growth until 2008, and since then has grown much more slowly than population as a whole, chiefly because of the onslaught of Boomers retiring.

In any event, whether we adjust by population as a whole, or by just the labor force, per capita real personal income has generally grown throughout the last 20 years.

Although it is not nearly as broad a measure as the Bureau of Economic Statistics' "personal income" metric, another way in which per capita income might be looked at is as real per capita adjusted gross income, i.e., the income reported to the IRS on tax forms.

While this is not kept graphically by either the IRS or the St. Louis FRED, I have created the following table showing real adjusted gross income from 1993 through 2011 (the last year available at the IRS site), adjusted per capita both by population, and by the size of the civilian labor force (+those not in the labor force but who want a job now).  The second measure is not perfect, but does make a reasonable approximation of taking into account the wave of Boomer retirements (all figures in $Trillions):

Year	Pop adjusted	CLF adjusted		Year	Pop adjusted	CLF adjusted
1993	4.813	4.356		2001	6.008	6.014
1994	4.864	4.486		2002	5.682	5.699
1995	5.015	4.726		2003	5.676	5.680
1996	5.214	5.010		2004	5.950	5.974
1997	5.520	5.534		2005	6.231	6.345
1998	5.854	5.721		2006	6.528	6.495
1999	6.123	6.048		2007	6.708	6.685
2000	6.365	6.365		2008	6.322	6.295
avg 1993-2000	5.471	5.258		avg 2001-08	6.138	6.148
2009	5.628	5.625
2010	5.824	5.887
2011	5.823	5.911
avg 2004-11	6126	6.152

Note that I have averaged each 8 year period of 1993 - 2000, and also 2001 - 2008, and separately 2004-2011.  The bottom line is that real per capita adjusted gross income was higher in both of the 8 year period calculations since 2000, than in the 8 year period ending in 2000.

Still, by virtually any measure, incomes since 2000 have generally been below that year.  That is partly because of demographics, since labor force participation starts to decline slightly after age 55 and more significantly after age 60, as shown in this graph (h/t Doug Short):

Additionally, the year 2000 marked the lowest point in the last 40 years for the unemployment rate, as shown in this graph of the unemployment rate on an annualized basis:

A smaller percentage of the population has been earning wages and salaries since the turn of the Millennium, and so median and average income has suffered.

Several weeks ago, David Cay Johnston wrote a column in which he used 2000 as a benchmark, and cumulated average and aggregate per capita adjusted gross income since then through 2012.  I criticized the column, and he objected to the criticisms.

As I read the column originally, the main point of the article appeared to be that Americans are having a tough time because wages have stagnated, and the discussion of income and the Bush tax cuts in the second part of the article were evidence offered in support. 

I have subsequently been advised, if I understand correctly, that the first part of the article (including the discussion of wages) was only introductory, and the main point of the article was:

1.  Bush promised that his tax cuts would deliver prosperity for all.

2.  Bush promised that the prosperity for all would include rising incomes, even including demographic changes that were well known.

3. Therefore it is appropriate to measure Bush's promise by using the measure of income, and declines in reported income due to demographic changes do not matter, since Bush promised they would not matter, (and possibly agreed that the appropriate yardstick was a comparison with 2000).

4. Looking at income as reported to the IRS, not only was there not prosperity for all, but the average taxpayer LOST income.

5. Therefore, by Bush's own yardstick, his tax cuts were a failure and different policy choices should be made.

If this is all true, then my criticism of the article as to conflating wages with income, and not adjusting for demographics, is moot, as they are not relevant to that yardstick.   Thus, while the writer did not adjust for Boomer retirements, had he done so, the outcome, as indicated above, is the same.  

Viewing the matter not by any unique Bush yardstick, but as a matter of general economic trends, it seems clear upon my reading that most readers did in fact confuse wages and income. In such discussions, a clarifying statement that to the effect that wages have stagnated, but partly due to demographics (retiring Boomers) and partly due to increased unemployment, income as reported by taxpayers has declined, would be easy to include.  I think it is a reasonable contemplation that the confusion evident among the comments I read, was a probable result of the omission of such a clarifying statement. Regardless, if the purpose of the article is as I have described it in 5 points above, then the issue of wages and demographics are simply not applicable in terms of an examination of what is said to be Bush's own yardstick. 

But to summarize in terms of economic data vs. a particular political yardstick:

1. The trend in real per capita personal income has been rising over the last 20 years, including since 2000.

2. The trend in real per capita adjusted gross income reported to the IRS has also risen generally in the last 20 years, but in much more variable fashion, with extended periods between old and new peaks.

3. The year 2000 marked the peak of the 1990s tech boom.  Only as measured by that specific year, or to a much smaller degree, using 1999 as the benchmark, does a subsequent cumulative decline appear.  As a matter of general economic discussion, whether measuring subsequent multi-year periods by reference to that specific year is appropriate or not, I leave to the reader.

International Week in Review: US Housing Market Stalling, Edition

This is over at XE.com's Currency Blog

http://community.xe.com/blog/xe-market-analysis/international-week-review-us-housing-market-continus-stall-edition

Weekly Indicators for July 21 - 25 at XE.com

 - by New Deal democrat

This week's installment is up at XE.com.

That layoffs last week were only 2000 above a 14 year low is extremely good news.

Bon-Ton Stores Are Shortable Below the 9-10 Price Range

The chart above is a weekly chart of the Bon-Ton stores.  Going back about a year and a half, the 9-10 dollar price range has provided tremendous support for the stock.  The stock has also had trouble developing any upward momentum.    It's only had two meaningful rallies in the last two years, and both fizzled out.

The chart tells us that if prices move below the 9 price range there is downside opportunity.  Let's look at the reasons why.  First, BONT is a department store, as explained in their latest 10-K:

The Company, a Pennsylvania corporation, was founded in 1898 and is one of the largest regional department store operators in the United States, offering a broad assortment of brand-name fashion apparel and accessories for women, men and children. Our merchandise offerings also include cosmetics, home furnishings and other goods. We currently operate 271 stores in 25 states in the Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner's, Boston Store, Carson's, Elder-Beerman, Herberger's and Younkers nameplates, encompassing a total of approximately 25 million square feet.

I really dislike retail for a number of basic reasons: margins are very low (meaning fixed costs are very high), competition is intense and the US consumer is still luke-worm on spending, especially on non-durables (BONT's bread and butter):

 
And then, like all retailers, there is the 200-pound gorilla in the room: AMAZON, which is hitting everybody in the industry hard.

The company's balance sheet is actually in OK shape.  The Current ratio has been fluctuating between 1.7 and 1.92 over the last five years.   While the quick and cash ratios are much thinner, this is to be expected from a retailer where inventory is over 80% if current assets.

The real story here is stagnating sales and lack of profitability.

As the chart above shows, the best pace of growth over the last 4 years was .86%.  And the margins aren't much better:

While the gross margin (in blue) has been printing at consistent levels over 35%, the best the operating margin has been over the last five years is 4.44%.  But the average margin for the same time period is 2.87% while the median is 2.45%.  Then there's the net margin level, where the best reading over the same time period is .71%.  And for the other four years, the company has lost money, which is slowly bleeding the company's cash:

Total cash has consistently dropped from $18.9 million to $7 million over the last five years.

And finally, there is the book value situation:

Using the standard assets-liabilities book value calculation, we see a drop from $141.7 million to $127.9 million over the last five years.  However, that calculation assumes inventory is valued at 100% -- which would never happen in the a fire sale.  So, valuing inventory at 50% (which is part of the G&D analysis) we get a negative book value.  Now, a store of this prominence would never sell for nothing.  The point, however, is this company's overall value is at best declining. 

Between the intense competition in the industry, a deteriorating revenue and margin situation and the declining overall value, this stock is a sell.  A technical move below $9 would indicate the market has re-evaluated the company's overall prospects negatively, meaning it would be time to short.

The information contained herein has been obtained from sources or data that we believe to be reliable, but we do not offer any guarantees as to its accuracy or completeness. Market information is subject to change without notice and past performance is no guarantee of future results. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security or other instrument.

The Weak EU Monetary Base And Investment Situation

This is over at XE.com

http://community.xe.com/forum/xe-market-analysis/weak-eu-monetary-base-and-investment-situation

Weekly Indicators for July 14 - 18 at XE.com

 - by New Deal democrat

This week's post is up at XE.com.  The positive trends keep on keeping on, especially with initial jobless claims.

International Week in Review: Hey, We're All Still Growing Moderately, Edition

This is up over at XE.com

http://community.xe.com/forum/xe-market-analysis/international-week-review-hey-were-all-still-growing-moderately-edition

US On Track For Stronger 2Q Growth

This is up over at XE.com

http://community.xe.com/forum/xe-market-analysis/us-economy-target-better-2q-growth

Wages Aren't Causing Inflationary Problems

The graph is self-explanatory.

Why Is Anyone Fighting For, Or Giving Money To, American Apparel?

• American Apparel is operating in a very weak consumer environment
• The company has not shown a profit in 4 years
• The company has a negative book value and a 60% debt/assets ratio.

There's been a fair amount of ink spilled on the American Apparel story.  One of the primary founders share ownership was diluted, so he devised a plan in conjunction with (I believe) a hedge fund to provide financing. 

However, here's the question for all the parties involved: why are you interested in investing in this company?

Let's start with the economic environment we're operating in by looking at personal consumption expenditures:

The year over year percentage growth in clothing and footwear expenditures is very weak.  There are numerous reasons for this (weak job growth, weak wage growth and low consumer confidence being primary contributors).  But the point is the macro environment is not encouraging.

And the company is not in good shape.  For example, they haven't shown a profit in four years:

While gross margins are fine, operating and net margins are negative or barely positive.  And top line revenue growth has been weak.  The best year was 2012 when gross revenue increased 12%.  But the 4 year average is 3.39%.

And then there's the declining book value.  Let's look at two simple measures of book value: pure value (assets-liabilities) and a modified version where I assume inventory is sold at 50% of value.

If the company has to be liquidated, the chances are you'll do so at a loss.  That means the most logical next step in the event of major problems is bankruptcy court, where no creditor wins.  And in the event the company winds up there, you've got a 60% debt/assets ratio with bond holders/lenders most likely holding senior covenants and other legal rights that supersede equity holders claims.

So, the company is operating in a weak industry, has slow revenue growth, has negative book value and hasn't made a profit in four years.  And, you're got creditors who's loans total 60% of assets, in addition to probably having all sorts of superior claims to equity holders.  This is not a good investment -- unless you're looking to short.

David Cay Johnston Post

David Cay Johnston has formally objected to New Deal Democrats post on Friday night. NDD has taken down the post as a courtesy and out of respect for Mr. Johnston and at least until such time as he is able to review and respond as may be appropriate to Mr. Johnston's objections.

Weekly Indicators for July 7 - 11 at XE.com

 - by New Deal democrat

My new Weekly Indicator post is up at XE.com.

Several important recent negative trends appear to be moderating.

International Week in Review: UK Data Disappoints Edition

This is up over at XE.com

http://community.xe.com/forum/xe-market-analysis/international-week-review-uk-data-disappoints-edition

GDP tanked when Medicare started, too

 - by New Deal democrat

There was an interesting article by Floyd Norris in the New York Times today, describing how the horrible final first quarter GDP  report was because:

a single government survey produced highly dubious numbers.....the results of a quarterly survey of service providers. The survey, conducted by the Census Bureau, [of] 18,000 companies in 11 service industries....

There are some possible explanations. Many of those who signed up for private health insurance under the Affordable Care Act did not do so until March and did not become covered until April or May. It could make sense for such people to defer some health care until they were covered.

That may have been what happened in 1965, the other year when health care spending declined in a quarter. That occurred while Congress was passing the legislation that established Medicare, beginning in 1966. There were large increases in health care spending after Medicare went into effect.

Sue enough, a graph of real GDP from the 1960s, shows this:

The report goes on to note that there is some evidence that weakness in health care spending carried over into the second quarter.  We'll start to see for real in a couple of weeks.

Angie's List: How Not to Run a Company

A recent post on Seeking Alpha detailed five reasons why the author didn't like Angie's list.  Two really stood out in my mind -- massive insider selling (never a good sign) and out of control expenses.  To satisfy my own curiosity, I took at look at the company's financials and agree with the author: Angie's List is not a company to invest in for the following reasons:

• The company is illiquid
• In the event of an extreme financial situation, they are ill-equipped to finance continuing operations
• The Company has five straight years of net losses and has negative operating margins
• The company's expenses are poorly controlled

Let's start by looking at the company's liquidity position:

Above is a chart of AL's current, quick and cash ratio for the last five years.  In only one year -- 2011 -- the company had positive numbers.  In all others (save the positive current ratio in 2012) this ratio was below 1.  This tells us that, in the event the company had an extremely negative event that hit revenue, they had insufficient assets to cover liabilities.  And the numbers get worse when looking at their DIR:

The DIR has never been above 1 in the last five years.  In fact, it's been below .4 80% of the time.  In the event all revenue stopped coming in, the company would be in very deep trouble very quickly.

Turning to the company's margins, we see that they have never had a positive operating or net margin in the last five years.  And compounding that problem is the out of control expenses:

In 2010 and 2011 operating expenses were growing faster than revenue growth.  And not by a small amount.  They were 22.13% higher in 2010 and 10.82% higher in 2011.  And while they were at least growing below revenue growth in 2012 and 2013, they were still growing at very quick rates. 

An argument could be made that my observations are based more on looking at Angie's List through the eyes of someone who prefers more established company financials rather than growth company financials.  This is a valid criticism.  However, the above financials are a total wreck; should growth slow, the company would face a cash shortfall quickly.  And given their poor net income situation, financing would be difficult to obtain on favorable terms.  The first metric a bank or credit analyst would look at is their liquidity ratios, and they would not like what they saw. 

And, to top it off, the insiders are dumping the stock.  That's a terrible sign; if there's anybody who should know the company, it's the people running it.  And they're leaving the stock as fast as they can.

The bottom line is clear: Angie's List is not well run.  And the insiders obviously agree with that as they're getting out of the stock as fast as they can.

Analysts Are Wrong in Revising Their US Interest Rate Projections

This is up over at XE.com

http://community.xe.com/forum/xe-market-analysis/analysts-are-wrong-revising-us-interest-rate-projections

Wage Growth and CPI Correlation

Above is a scatterplot comparing the year over year percentage change in seasonally adjusted average hourly earnings of "non-supervisory" employees and the Y/Y rate of change in CPI.  Notice the positive correlation: when wages increase at a higher rate year over year, CPI is likely to follow. 

Let's place the above data into a wage context:

Right now, the average hourly earnings of non-supervisory workers is low by historical standards, indicating that we can expect weaker pressure on prices from this data set.

Unemployment rate of less than 6% in coming months looks likely

 - by New Deal democrat

I have a new post up at XE.com, updating a graph I have periodically run showing how the population adjusted rate of initial jobless claims leads the unemployment rate.  It appears that an unemployment rate at long last under 6% is in prospect in the next few months.

France: The Sick Man of the EU

This is over at XE.com

http://community.xe.com/forum/xe-market-analysis/france-sick-man-eu

Blackberry's Current Asset Managment Bodes Well For the Future

A really good friend of mine used to love his Blackberry.  In fact, he called it is "crackerry" because he couldn't put it down.  This was about 3 years ago, and, over that time, we've seen the strong rise of Apple and Samsung as the emerging companies in the cell phone market.  But recent price action of BBRY has been positive, indicating the market is taking a second look at this company.

First, here's a long-term chart:

Here we clearly see the fall from investor grace, as the stock traded from the upper 70s to now a price around 10.  However, since mid-2012, the stock has been building a very strong technical base, consolidating losses.  In addition, it has rallied two times from the mid level of $5 and $6 share.

All of the charts below are from the last 5 quarters of financial information.

When looking at the company's financials, our first concern should be the liquidity position.  Blackberry is in a financially precarious position; it is trying to turn around in a fiercely competitive industry.  That means it needs to be able to cover its short term liabilities from its balance sheet.  As the chart below indicates, management is more than up to that task:

 

 

All of Blackberry's short term liquidity ratios are rising.  The current ratio is now slightly below 2.5 while the cash ratio is 1.52.  Also note the revised quick ratio where I assume receivables are sold at 75% of reported value is rising as well.  Current management has done very well in creating a highly liquid company in a very difficult environment.

 

Their defensive interval ratio is also in very good shape.

 

 

 

 

The DIR is a ratio of cash, cash equivalents and receivables to COGS, SGA and R&D expenditures.  What we want to make sure of is the company has enough cash on hand to cover expenses.  Notice that this number has been increasing.  The gold column is a ratio that excludes receivables.  The last two quarterly readings have been around 3, which tells us the company is extremely liquid.

 

Let's next turn to the receivables and inventory management.  Two things are common for a company in bad financial straights:

 

1.) To extend an increasing amount of credit to customers thereby closing sales that are on weaker financial footing. 

 

2.) To get caught with a large amount of inventory on their books as a result of declining sales. 

 

Blackberry has prevented both of those situations from developing:

 

 

Receivables as a percent of current assets have decreased from 35.63% to 17.10%, while inventory as a percent of current assets has decreased from 12.46% to 2.46%.

 

And finally, here is a chart of their operating - investing cash flows:

 

 

 

The point of this metric is to determine if the company is generating sufficient cash flows to cover their investments.  If this number is positive, the company begins to have more financing options, allowing it to choose between different methods of raising capital.  As the chart above shows, this number has been increasing consistently over the last five quarters, turning positive in the last quarter.

 

None of this takes away from the daunting task facing the company.  Quarterly gross revenue has dropped from a little over $3 billion to $966 million.  Book value has been cut by 2/3, falling from $9 billion to $3 billion.  And that's before we get into the difficulty of re-establishing a brand against two tech giants in Samsung and Apple.  However, the above data indicates that at least financially, the company is in good hands.