There’s more than one way to skin a cat and there’s more than one way to look at the economy. Some ways are more useful than others. About a week ago I started looking at Final Sales Real GDP per capita. That’s a mouthful. …
So why use this concept rather than more traditional tools?
Final Sales represents a number driven by demand by consumers. It is not affected by inventory build up or pay down. It’s a better estimate of what you can expect in the future.
The per capita metric shows product spread over the entire population. If it goes up it means the economy is able to improve the income of each member of the population and if it goes down it means we will all individually enjoy less of what the economy is able to produce. It is the truest statement of whether our economy is growing for the benefit of its entire population as a whole.
As this number goes down consumers will over time become less optimistic. Consumer confidence will drop. If it goes up consumer confidence will increase and spending will increase.
In a strict sense though this metric represents the entire number of decision makers in the economy, both business decision makers and consumer decision makers. They each would become more or less optimistic as this metric goes up and down.. So FSGDP/capita represents both consumer and business confidence as well.
What I like about this metric is it leads to a merging, at this one point anyway, of both macro and micro economic concepts.
Here is how growth in FSRGDP/C looks for the last three years:
2008 … -2.9%
2009 … -1.3%
2010 … +0.1% ytd
This is not nearly as positive looking as regular GDP growth. It is easy to see looking at the economy this way that we all had reason to feel very negative up until 2010 and since the beginning of the year we don’t have much more to feel good about with our lot looking pretty much like it did when the year started.
However looking at the economy this way points to a truth that with everyone feeling pretty neutral as a whole, since the first of the year, a relatively small change one way or the other can tip the balance towards decline or positive growth. So while gross GDP in real dollars looks like its growing about 2.6% annually, in reality only a small change of plus or minus as little as .5% can tip consumer and business confidence and thus the economy (now in neutral) into either recession again or sustained growth. The somewhat counter intuitive insight here is that +2% GDP growth could be recessionary.
To isolate the consumer further and get a better idea how he and she is feeling we can take a little bit different tack and separate the business decision makers from the consumer decision makers by using personal income per capita instead. This metric while describing the consumer better does not do as a good a job as FSRGDP/C in telling us what the most likely rate of growth would be in the immediate future.
Here’s how it looks for the last three years:
2008 … -0.1%
2009 … -0.2%
2010 … +0.9% ytd
This looks a lot more positive than it does from the production side and may be due to what economists call unilateral transfer payments, like Medicare and Social Security, unemployment benefits, etc. As a descriptive statistic for consumer confidence it would show consumers, after so many months of increased income, are feeling more and more confident. At some point they will start to further increase their financial commitments. As that happens business confidence should increase as well. Even if the growth rate were not to increase beyond the current .9% rate, the replication of that growth rate in future months would be enough to eventually right the economy.
Based on leading indicators as well as the most current economic data it looks like things are either continuing to improve slightly or could possibly improve beyond that. The tilt is now decidedly to the upside no matter how slight, with the prospect of additional positive data pointing to an increasing rate of growth in the future.
The conclusion I reach is the economy will start growing very soon and at some point in the not too distant future there could be a sharp upward trend.
With the proposed tax bill in congress with all the extra goodies for the unemployed, businesses and the wage earners beyond the original Bush tax cuts, it now looks like we will have major stimulus coming at a point in the cycle that could translate into large and sustained growth. Unfortunately it is beginning to also look like this growth push may be too strong and could sow the seeds of the next recession. But for now the increase in growth would be welcomed by everyone.