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No Raise, Fewer Jobs, Less Dividends, Less Credit = No Economic Growth.

Thursday, April 9, 2009, 12:34 PM

Note: This blog post is a bit longer than usual...in it I add up the cumulative impacts of changes in income and credit on the overall economy.

Much is being trumpeted by the government and the press about “the bottom being in” and that a recovery is right around the corner. The recent stock market gains are being used as a primary source of evidence for this idea.

But is the stock market a good indicator of anything? We might note, somewhat critically, that the stock market did a terrible job of predicting the downturn (see below) and wonder why it should be any better at predicting the recovery.

Dow_Jones.jpg

Now that the NBER has finally backdated the recession to the 4Q07 (marked by the blue and gray rectangle), we can see that “the great discounting machine” known as the stock market failed to foresee the current downturn and does not appear to predict anything. With a track record like that, we might want to get ourselves a “second opinion” on where things stand right now.

So let’s turn again to the base data. We know that just over 70% of the economy rests on consumers. How are “the consumers” doing here? One thing we might analyze is how much money and credit consumers have, under the theory that the more they have, the more they’ll spend. Let’s start with jobs.

Job losses

NEW YORK (CNNMoney.com) -- Job losses continued to mount in March and unemployment hit a 25-year high, according to the government's latest reading on the battered labor market Friday.

For the first three months of the year, 2 million jobs have been lost, and 5.1 million jobs have been lost since the start of 2008.

Assuming that each of those jobs was at the average yearly wage of roughly $40,000, or $3,300 per month, we can estimate that 2M x $3,300 or $6.6 billion of income per month is now gone from the national stream just in 2009.

Since the start of 2008, this number would be nearly $17 billion per month in lost spending power.

Wages

NEW YORK (CNNMoney.com) -- About a quarter of businesses have frozen workers' salaries for 2009 in the wake of a pessimistic economic outlook, according to a survey released Monday.
Outsourcing and consulting firm Mercer said 25% of organizations surveyed said they have already decided not to raise their employees' pay, and another 20% are considering a salary freeze this year. A year ago, just 5% of companies planned to suspend raises for their staff.

It would appear that wage hikes are not going to be a comforting source of income gains this year. No surprise there. In aggregate, this has added up to a nearly $30 billion per month decline in wage and salary disbursements according to the BEA:

Private wage and salary disbursements decreased $29.9 billion in February, compared with a decrease of $27.1 billion in January. The January change in private wages and salaries was reduced by an adjustment of $20.0 billion (at an annual rate) for smaller-than-usual bonus payments.

Dividends

Well then, how about dividends? Dividends are a major source of income in this country.

If you recall, in 2007 Microsoft pumped out an enormous $32.6 billion dollar, one-time, dividend payment, sending a shock wave through the data.

Microsoft Corp.'s $32.6 billion special dividend payment last month raised personal income nationwide and probably worsened the U.S. current account deficit in the fourth quarter, the Commerce Department said.

About $24 billion of the payment will be recorded as personal dividend income in December, for an annual rate of $288 billion, the department's Bureau of Economic Analysis said. That's enough to boost total U.S. personal income by 2.9 percent in the month, according to Bloomberg News data.

We will note that it was insane to annualize this one-time payment, but that’s what the BEA did, causing all manner of comparison difficulties. At any rate, we might take away from this that this $24 billion translates into a 2.9% gain in personal income, which translates into a very rough approximation of 0.1% shift in personal income for every $1 billion in dividend income that applies to personal income.

Given this, we might wonder what a $77 billion dollar reduction in dividends would mean.

NEW YORK, April 7 /PRNewswire/ -- Standard & Poor's, the world's leading index provider, announced today that a record 367 of the approximately 7,000 publicly owned companies that report dividend information to Standard & Poor's Dividend Record decreased their dividend payment during the first quarter of 2009…

'The mammoth $77 billion reduction in dividend payments during the first quarter is eye popping,' says Howard Silverblatt, Senior Index Analyst at Standard & Poor's. 'The full impact of these cuts will be felt this quarter, when the dividend check is sent in the mail.'

Based on the Microsoft experience, I can estimate the size of the impact on personal income at nearly $58 billion or 5.8% of personal income.

When we review this corporate reduction in dividends against past years, we see that 2009 stands out as being not just slightly different, but starkly different. No surprise there either I suppose.

Dividend_Actions.jpg

Declines in consumer credit

The largest drop in consumer credit ever recorded was just announced this week, which is really quite a shocking thing to those who believe that you “should never underestimate the US consumer.”

WASHINGTON (MarketWatch) – The balances on American consumers’ credit cards fell at a 9.7% annual rate in February, the fastest rate of decline since 1976, the Federal Reserve reported Tuesday.

Total outstanding consumer credit, including both revolving and nonrevolving credit, fell at a 3.5% annual rate, or $7.5 billion to a seasonally adjusted $2.56 trillion, the Fed said. Credit expanded by a revised $8.1 billion, or 3.8%, in January.

Adding it all up

  • Wage and salary declines (due to freezes and job losses): ~$30 billion/month
  • Dividend hits: ~$75 billion/quarter or $25 billion/month
  • Credit declines: ~$7 billion/month (if February results repeated).

Together we are in the vicinity or $60 billion per month in reduced money or credit, which, if translated directly into reduced economic activity, would be a nearly 5% decline in US GDP this year.

Of course, any propensity towards additional saving would only compound the amount of decline in GDP, and the rate of personal savings is up quite a bit on a year over year basis.

I have not yet seen any change in this sort of fundamental data that would indicate that a bottom is in, or that the recovery has begun yet.

I cling to the antiquated notion that the economy consists of real people spending either real money or using credit.

The stock market seems to differ with this view and appears to me to be overly anxious to return to “how things used to be,” without taking into account the possibility that things are now different that they used to be.

At least, that's how I see it.

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20 Comments

Jarhett's picture
Jarhett
Status: Silver Member (Offline)
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Posts: 132
Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

I think you have mis marked your Dow chart.  Isn't the 4th quarter of 2007 supposed to be in October of 2007???, and not in October of 2006.  In your chart the Dow rises from October 2006 till October 2007.  You have marked October 2006 as when the recession started. 

cannotaffordit's picture
cannotaffordit
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

We see it the same way Chris, and appreciate you presenting it so succinctly.  It would be nice if somebody in government and/or the major news media would put out the information the same way you did (do) so that the average citizen (what's that?) could know the truth.  It might just start a movement (if you know what I mean).

mpelchat's picture
mpelchat
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

When a building is demolished there is a moment of calm between when the explosives are ignited and the collapse happens.  We are in that calm.  How long will the calm happen that is the question.

cmartenson's picture
cmartenson
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

Whoops!  Wrong chart.

Let me go get the right one (which I even posted yesterday...now where is it?)...oh yes...here it is...fixed!

Davos's picture
Davos
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

Hello MpelChat:

Just a guess, but I'd say almost 1/2 way there based on the charts. I wouldn't be surprised though if this thing picks up speed, in other words: things could decay at a more expeditious rate when TSHTF. Take care

 Good charts of then vs now

http://www.nakedcapitalism.com/2009/04/world-economy-falling-faster-than-in.html 

PS I'll know it is bad when Cramer and the other boobalings wake up and calls this a depression 

LuciusQuintius's picture
LuciusQuintius
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

Chris,

It'd be my guess that personal income lost from unemployment is harder to calculate - you need to factor unemployment compensation against your loss assumptions, then figure out how many people are still on extended unemployment benefits, how many have given up, etc.

Lucius

JAG's picture
JAG
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Posts: 2492
Re: Cramer...

Cramer's goonies sent me an email this past weekend declaring that his portfolio out-performed 9 of the10 best performing mutual funds. I have personally tracked his portfolio over the last year and it lost more than 40% in 08! That sounds like a portfolio to be hyping! Idiots...

EndGamePlayer's picture
EndGamePlayer
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

I'll add to the thought -

We'll see how much of a rally is really going on after April 20th, when most of the people have their IRAs & KEOs in and are done pushing it up. Everyone is buying on the "everything is on sale in the market" and "it can only go up from here" theory.

Sitting back and watching. . . 

Goal Digger's picture
Goal Digger
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Posts: 39
What timing?!?!
Obama's top economic adviser: 'free-fall' ending
Apr 9 03:24 PM US/Eastern
By MARTIN CRUTSINGER
AP Economics Writer
WASHINGTON (AP) - The economy's steep plunge appears to be ending, a top presidential adviser said Thursday, but he refused to predict how high the unemployment rate will rise before a sustainable recovery begins.

Lawrence Summers, director of President Barack Obama's National Economic Council, said there have been some encouraging signs the dive in economic activity that began late last year was drawing to a close.

"There has been a substantial anecdotal flow over the last six to eight weeks of things that felt a little bit better," Summers told the Economic Club of Washington. "The sense of a ball falling off a table, which is what the economy has felt like since the middle of last fall ... we can be reasonably confident that that is going to end within the next few months and we will no longer have that sense of a free-fall."

But Summers refused to predict how strong the rebound will be or when it will take hold.

The economy, as measured by gross domestic product, has to be growing at a rate of around 2.5 percent just to keep the unemployment rate constant. A GDP growth rate of 1 percent, while in positive territory, means the jobless rate would still be rising, Summers said.

The unemployment rate surged to a 25-year high of 8.5 percent in March, the government reported last week. That followed a fourth quarter when the GDP plunged at an annual rate of 6.3 percent, the biggest drop since 1982.

The Federal Reserve expects the unemployment rate will probably "rise more steeply into early next year before flattening out at a high level over the rest of the year," according to minutes from the central bank's March meeting released Wednesday.

Many private economists expect the jobless rate to keep rising, even if the economy begins growing later this year, and likely will peak above 10 percent early in 2010.

Summers got a laugh from the audience when he said the presence of seven television cameras was "seven too many" for him to forecast the unemployment rate's peak.

Two protesters who unfurled a pink banner reading, "We want our $$$ back," later interrupted his appearance by shouting that Summers should resign because of the amount of money he earned from the financial sector last year before joining the administration.

Recent financial disclosure reports showed that Summers received about $5.2 million in compensation as an adviser to hedge fund D.E. Shaw last year and more than $2.7 million in speaking fees from financial firms.

Summers did not respond to the taunts before the protesters were led from the room.

Davos's picture
Davos
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

flying+pig.jpg

A clueless wonder. How they expect to have an economy without employment is beyond me. Harvard should be ashamed to have their name associated with the moron.

IMNSHO. Take care 

bsm20's picture
bsm20
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

The stock market seems to differ with this view and appears to me to be
overly anxious to return to “how things used to be,” without taking
into account the possibility that things are now different that they
used to be.

The stock market is now (and has been for a long time) far more about perception and possibility than about valuation and earnings.

In a world where real wages have been essentially flat for something like 10-20 years (depending on the metric you want to use), the current job/wage situation and forecast are bleak, and credit is available only to (not from) major banks, the only chance of improving one's standard of living seems to be to increase one's net wealth via asset appreciation.

For the vast majority of the consumers (didn't we used to be citizens?) driving that 70% of GDP, their major assets (real-estate and stocks) have tanked.  Real estate is off something like 40%, with people calling (hoping?) for a bottom anywhere from 50-80% off the highs.  People can see the empty houses in their neighborhood.  They see the foreclosure notices in their newspapers.  They know that their real-estate wealth is not coming back any time soon.

That leaves the stock market as the sole beacon of hope for increased wealth and an improved (or even maintained) standard of living.  People, both the average person on the street and the money managers, simply cannot come to grips with the idea that their debt-based gravy train is in permanent decline.  They desperately need the market to come back, and they, frankly, are "betting" it accordingly.  They're betting the upside because they simply cannot handle any more downside.  When the other shoe falls on this suckers rally, many, many people will be even more deeply disolutioned.

In short, the market is no longer an indicator of anything other than the general perception of the degenerate gamblers still trying to double down using other people's money.

Brian

 

emhswm's picture
emhswm
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

How would you add in;

a) unemployment benefits, and

b) the stimulus dollars, though they're admittedly trickling in slowly

It seems they  should be considered in this analysis, and it would nominally improve the projected GDP - though it wouldn't materially change the analysis.

 

TW

Davos's picture
Davos
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

Hello emhswm:

Personally, and IMHO, I think both excerbate the problem. Please don't get me wrong, I'm all for a safety net for workers. What I am saying is that both are adding to the problem - debt and devaluation.

My 2 cents 

fernando banos's picture
fernando banos
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Re: No Raise, Fewer Jobs

    

    Aditional loss of income are lower rents and lower annuities for a lot of people. 

cpendle3's picture
cpendle3
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

Hello from Maine,
Many of us commercial fishermen have been so severely regulated in our attempt to rebuild fish stocks that we are by most standards unemployed. The fact- that we are not counted and can not receive unemployment compensation - if we were added to the growing unemployment numbers Maine would rightfully be declared bankrupt. My winter shrimp season saw a decline of 90% due to limited processing and terrible market conditions fueled by low quality imports from south asia. The reason for my post is as I read this great information on Chris Martenson's site, its mostly about money. I just want to raise the issue of food, food safety and food production. Local American producers of food are declining faster than the value of our money and not too many people are paying attention. I think it is a serious concern.

Ray Hewitt's picture
Ray Hewitt
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

I think the idea of the stock market as a leading indicator came from the days when the large majority of investors were individuals who traded their own accounts; most remembered the Great depression years. Then, the market reflected the rise and fall of individual fortunes. But now with the various sorts of pension plans, it is dominated by professionals with a stream of money less flexible than when it was under individual control. Another factor are the cooked statistics and lies that make the economy look better than it really is. Then there is the dumbed down Keynesian Theory taught in practically every college in the world.

There is so much going on below the surface that the establishment crowd doesn't see. I wouldn't be surprised that when panic does  hit, it's going to come like a magnitude 10 earthquake.

bigpicture's picture
bigpicture
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...
EndGamePlayer wrote:

I'll add to the thought -

We'll see how much of a rally is really going on after April 20th, when most of the people have their IRAs & KEOs in and are done pushing it up. Everyone is buying on the "everything is on sale in the market" and "it can only go up from here" theory.

Sitting back and watching. . . 

Interesting date, April 20 considering Armstrong's next down leg is April 23.... http://www.nowandfutures.com/buscycle.htm

I have not searched the forum if Armstrong's Pi cycle has been posted previously. Apologies if its repeated.

 

A. M.'s picture
A. M.
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Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

Goal Digger,

Quoting from your source:

Quote:

"There has been a substantial anecdotal flow over the last six to eight weeks of things that felt a little bit better," Summers told the Economic Club of Washington. "The sense of a ball falling off a table, which is what the economy has felt like since the middle of last fall ... we can be reasonably confident that that is going to end within the next few months and we will no longer have that sense of a free-fall."

I like analogies - and I see this less as a "ball falling off a table" and more like a "Car destroying itself in an accident".

Mainly because a ball creates no collateral damage, and suffers no physical damage to itself, presumably.

Cars, however, cannot fall off tables ad infinitum, as can the ball. After each accident, they must be rebuilt. Sure, there is metal and glass and plastic left, and in some cases the scrap can be used to cobble together another functioning car, and so long as the operator doesn't die... it may, once again drive.

What we're looking at here isn't just a car wreck.
It's a pile up. And it'll take more than platitudes and optimistic talk to repair the rubble that comes out of this - once the demolition derby finally ends - which it doesn't look like it has.

Our leadership is either asleep at the wheel, pun intended, or totally incompetant.

Thanks for sharing the article!

Cheers,

Aaron

A. M.'s picture
A. M.
Status: Diamond Member (Offline)
Joined: Oct 22 2008
Posts: 2368
Re: No Raise, Fewer Jobs, Less Dividends, Less Credit = No ...

Double post. Apologies.

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