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Chart Of The Day: Incomes And The Cliff Effect

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    February 3, 2013

    Last week the Bureau of Economic Analysis released December’s data on personal income and expenditures.  This is an important data set since personal consumption expenditures (PCE) makes up more than 70% GDP.  For the month of December the total consumption of goods and services increased by $22.6 billion which just slightly more than half of November’s increase of 41.6 Billion.  While a bulk of the increase in November was related to the effects of Hurricane Sandy the decline in December should not be readily dismissed.  The reason for the focus on December’s PCE is the Personal Income (PI) report which showed a massive surge of $352.4 Billion in December and is our chart of the day.


    The surge in incomes in November and December was due to businesses paying out special dividends, bonuses, etc. prior to the end of year expiration of the “Bush Tax Cuts” as the“Fiscal Cliff” loomed large.  However, the greatly anticipated “Battle of Thermopylae” where 300 Republicans would defend the country from higher taxes and achieve great spending cuts against the legions of Democrats, turned into a bloodless battle as Republican’s folded like wheat before the wind.

    The problem with this surge in incomes is twofold:  1) It is a one time effect that has already evaporated in the system and January will record a very sharp decline in incomes and subtraction from savings; and 2) the surge in incomes did not translate into higher levels of consumption that would boost economic activity.   This is shown clearly in the chart below which shows the monthly net changes to PCE and PI.


    This is because special dividends primarily flowed through to business owners, shareholders and executives at the upper end of the income brackets.  This one time boost to incomes from special dividends did very little to enhance the financial position of the majority of the country that is living paycheck-to-paycheck.  This situation is likely to be further exacerbated in the January reports on PCE and PI as the 2% increase in payroll taxes hits an already strapped consumer.

    The various anomalies to the economic data caused by Hurricane Sandy, the “Fiscal Cliff” effect, QE3/4 and what is currently the warmest winter on record in 55 years, will make it very difficult on recession forecasting for the next several months.  It will likely not be until Q2 of this year before the data returns to more normalized trends.  However, with the “Debt Ceiling”debate approaching in May it might even be longer than that.  In the meantime all we can do is continue to analyze the trends of the data and make adjustments accordingly.

    One thing is for sure – the table is set for a rather large correction in the markets as overbought, overbullish and overvalued conditions are pushing extremes.  The reversion of the data in the upcoming reports for January could well be the short catalyst necessary to spark that correction.  Caution is advised.

    Images: Flickr (licence attribution)


    About The Author

    Lance Roberts – Host of Streettalk Live

    lance robertsAfter having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.