Disposal Income = (Economic Growth)squared

That’s not quite Einstein’s formula, but it’s worth remembering.

The front page of the Tuesday Wall Street Journal included a story, “Parents Are Drowning in College-Loan Debt.” (1) Subsequent days brought reports of subpar GDP growth (2), disappointing job creation numbers (4) and very low levels of consumer spending (5). Duh.

People spend money when they have money to spend. Really.

Apparently, that’s a difficult concept for retailers and many government officials. When you

  • Increase health care costs (doing away with subsidies and driving insurers to sharply higher premiums),
  • Increase taxes (doing away with tax deductions for state and local taxes will  wipe out any benefit from tax reform that most people get),
  • Cut back on Federal assistance with student loans, and
  • Get into trade wars that drive up the cost of things Americans buy

you reduce the ability of Americans to spend money on cars, vacations or anything else non-essential that helps to drive the US economy.

The stock market and the economy got a modest boost from the election. Now reality is rearing its ugly head.

  • Layoffs aren’t just for the retail sector; they’re reportedly happening even in big pharma companies like BMS.
  • Auto inventories are piling up and there have been reports of planned factory shut downs this summer.
  • Airline passenger load factors (passengers versus capacity) are down from a year ago.
  • There’s a new crop of college graduates with the wrong skill sets for what business needs.

The unemployment figures are political. The Bureau of Labor Statistics report from 7 April lists 7.2 million people as unemployed. However, there’s another 1.6 million who are unemployed but haven’t looked for work in the last four weeks and who aren’t counted as unemployed. Add them, and the unemployment rate shoots up, not down.

The most recent jobs report showed 98,000 people gaining work in March. Prior to the 2008 recession, the benchmark for a robust economy was 300,000 jobs per month — enough to keep up with growth in the workforce.  The last time the US came close that 300,000 figure was in June 2016. The last time the US surpassed that target was in September 2015.

Disposable income means everyone. It’s the ability of Joe Sixpack to buy a car that drives the US economy. Giving tax breaks to the Walton clan doesn’t help Wal-Mart sell anything.

Are we about to start the next recession?


Sources:

  1. Josh Mitchell, “Parents Are Drowning in College-Loan Debt,” The Wall Street Journal, 25 April 2017, p.1.
  2. Trading Economics, “United States GDP Growth Rate,” 28 April 2017. http://www.tradingeconomics.com/united-states/gdp-growth
  3. US Dept of Transportation, Bureau of Transportation Statistics, “U.S Air Carrier Traffic Statistics through January 2017.” https://www.transtats.bts.gov/TRAFFIC/
  4. US Dept. of Labor, Bureau of Labor Statistics, “The Employment Situation — March 2017,” 7 April 2017. https://www.bls.gov/news.release/pdf/empsit.pdf
  5. Douglas Gillison, “US growth hits 3-year low in Trump’s first quarter,” https://www.yahoo.com/news/us-growth-hits-3-low-0-7-trumps-132946497.html
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