09|13 BUSINESS-CYCLE CONDITIONS
The Consumer Lags Behind
by Polina Vlasenko, PhD, Research Fellow
Expansion continues,
but stagnating
personal incomes
pose a threat to
long-term growth.
T
sales, employment, and industrial
production—continue to rise.
The recovery does not
benefit all parts of the economy
equally. Business is gaining an
outsized share of the growth,
while households and individuals
are not benefiting much.
Overall, 91 percent of AIER’s
he four-year-old economic
expansion is likely to continue,
according to the latest data
reflected in AIER’s indicators of
business-cycle conditions. While
the pace of recovery may not
be spectacular, all of the broad
measures of aggregate economic
activity—gross domestic product,
THE INDICATORS AT A GLANCE
Shaded bars represent official recessions. A score above 50 indicates expansion.
PERCENTAGE OF
AIER LEADERS
EXPANDING
100
75
50
91
25
0
1985
PERCENTAGE OF
AIER COINCIDERS
EXPANDING
1988
1991
1994
1997
2000
2003
2006
2009
2012
100
75
50
100
25
0
1985
PERCENTAGE OF
AIER LAGGERS
EXPANDING
1988
1991
1994
1997
2000
2003
2006
2009
2012
100
75
50
100
25
0
1985
CYCLICAL
SCORE OF
AIER LEADERS
1988
1991
1994
1997
2000
2003
2006
2009
2012
100
75
50
90
25
0
1985
aier.org
1988
1991
1994
1997
2000
2003
2006
2009
2012
AMERICAN INSTITUTE FOR ECONOMIC RESEARCH
1
primary leading indicators are
appraised as expanding (10
out of 11 indicators for which a
trend is apparent) up from 82
last month. The cyclical score
of leaders, which is based on a
separate, mathematical analysis,
has edged up to 90 from 88 last
month. With both measures
comfortably above 50, the leading
indicators suggest that the
recovery is likely to continue.
STATISTICAL INDICATORS OF BUSINESS-CYCLE CHANGES
Change in Base Data
APR
MAY
JUN
Cyclical Status
JUL
PRIMARY LEADING INDICATORS
JUN
JUL AUG
+
+
-
+
M1 money supply (1)
+
+
+
+
+
+
+
Yield Curve Index (1)
+
+
+
‑
‑
+
-
Index of manufacturers’ prices (2)
-?
-?
-?
+
+
+
New Orders for consumer goods (3)
+
+
+
+
+
+
New Orders for core capital goods (4)
+
+
+
New housing permits (3)
+
+
+
+
+
+
+
Ratio of manufacturing and trade sales to inventories (3)
-?
-?
+
-
+
+
Vendor Performance (2)
+?
?
?
+
+
-
+
Index of common stock prices (constant purchasing power) (2)
+
+
+
nc
nc
nc
-
Average workweek in manufacturing (3)
+
+
+
+
-
+
+
Initial claims for state unemployment insurance (inverted) (3)
+
+
+
‑
‑r
+
Change in consumer debt (4)
+
+
+?
PERCENTAGE EXPANDING CYCLICALLY
83
82
91
PRIMARY ROUGHLY COINCIDENT INDICATORS
+
+
+
+
Nonagricultural employment (1)
+
+
+
-
+r
+
+
Index of industrial production (1)
+
+
+
+
+
-
Personal income less transfer payments (1)
+
+
+
+
+
Manufacturing and trade sales (2)
+
+
+
+
+
+
Civilian employment to population ratio (2)
+?
+
+
+
+
+
Gross domestic product (quarterly) (1)
+
+
+
PERCENTAGE EXPANDING CYCLICALLY
100
100 100
Average duration of unemployment (inverted) (2)
+
+
+
Manufacturing and trade inventories (1)
+
+
+
+
Commercial and industrial loans (1)
+
+
+
+
PRIMARY LAGGING INDICATORS
+
-
+
+
-
+
+
-
+
+
+
Ratio of consumer debt to personal income (1)
+
+
+
+
+
+
Change in labor cost per unit of output, manufacturing (2)
+
+
+
-
-
nc
Composite of short-term interest rates (1)
?
?
?
PERCENTAGE EXPANDING CYCLICALLY
100
100 100
nc
nc No change. r Revised. U­ nder “Change in Base Data,” plus and minus signs indicate in­creases and decreases
from the previous month or quarter; blank spaces indicate data not yet available. Under “Cyclical Status,” plus and
minus signs indicate expansions or contractions; question marks indicate doubtful or indeterminate status.
2
BUSINESS-CYCLE CONDITIONS
SEPTEMBER 2013
There are disparate trends
for the sales of consumer
products versus products
purchased by businesses.
AIER’s coincident and
lagging indicators, all of which
are appraised as expanding,
with many reaching new highs,
confirm that the economy has
been growing for some time.
The biggest change among
the leading indicators this month
is the substantial increase in
the ratio of manufacturing and
trade sales to inventories.
A jump in manufacturing and
trade sales, one of our coincident
indicators, is responsible for
the increase. In the 12 months
to May, the latest month for
which data are available, sales
increased an inflation-adjusted 4.6
percent and reached the highest
level in more than 50 years that
the data had been collected.
The level of sales surpassed
the previous peak reached in
October 2007, two months before
the Great Recession started.
But there are disparate
trends for the sales of consumeroriented products versus
products that are more likely
to be purchased by businesses,
with business taking the lead.
This disparity is most visible
in the sales of durable goods.
Increases are concentrated in
machinery, equipment, supplies
and professional and commercial
equipment. These products
are likely to be purchased by
businesses rather than people.
Sales of durable consumer
goods, such as appliances,
furniture, and computers,
are stagnating. The types
of consumer goods that are
posting sales increases tend
to be nondurable necessities,
such as groceries and fuel.
One exception is the increase
in sales of motor vehicles and
parts, which are difficult to divide
into purchases by businesses
and purchases by people.
All this adds up to a picture
of an economy where businesses
are doing fairly well, while
consumers are focusing on
meeting everyday needs.
These trends are echoed in
other indicators. New orders
for core capital goods, a leading
indicator, has been rising steadily
for a year. Since July 2012, it
has increased by 8.4 percent
and currently stands only an
inflation-adjusted 10 percent
below its pre-recession value.
In contrast, growth in
new orders for consumer goods,
also a leading indicator, has
slowed. Over the past year, new
orders for consumer goods rose
only 3.3 percent and remain
more than 15 percent below
the pre-recession peak.
The value of manufacturers’
shipments of consumer goods
has been falling for four months
and currently stands at about the
same level it was in July 2012.
The value of unfilled consumer
Businesses are doing fairly
well, while consumers
are focusing on meeting
everyday needs.
aier.org
MANUFACTURING AND
TRADE INVENTORIES
Manufacturing
and
(constant
dollars, billions)
Trade
Inventories
AN IMBALANCE EMERGES
Business investment is
brisk. Growth in consumer
demand has slowed, with
sales of durable consumer
goods stagnating.
1600
800
Ratio of Manufacturing and
RATIO OF MANUFACTURING AND TRADE
Sales to Inventories
SALESTrade
TO INVENTORIES
400
NEW ORDERS FOR CONSUMER GOODS
New
Orders
forbillions)
Consumer
(constant
dollars,
Goods
160
MANUFACTURING AND TRADE SALES
Manufacturing and
(constant
dollars, billions)
Trade Sales
80
NEW ORDERS
New
OrdersFOR
for CORE
CoreCAPITAL GOODS
(constant
dollars,
billions)
Capital Goods
1200
80
40
600
goods orders is close to the lowest
level in more than 20 years. It has
been stuck in the narrow range
of $3.7-$4.4 billion ever since the
recovery officially began in June
2009. (See Chart 1 on page 4.)
When unfilled orders are
high, it means that demand is
growing faster than manufacturers
can expand supply, and some
orders go unfilled for a while.
When unfilled orders are low,
it means that demand is slack
and manufacturers can easily fill
almost all orders that come their
way. That is what is happening
now with consumer goods.
Another sign of slack
20
in consumer demand is the
accumulation of inventories.
Manufacturers’ inventories
of consumer goods (part
of manufacturing and trade
inventories) have risen close to
the level they gained in early
2008, as the economy was
about to go into a tailspin.
The picture is different for the
investment goods purchased by
businesses. Demand for capital
goods is sufficiently strong
that the producers are falling
behind on fulfilling orders.
Inventories of core capital
goods have been falling since last
October. Unfilled orders have
AMERICAN INSTITUTE FOR ECONOMIC RESEARCH
3
Chart 1. A Measure of Consumer Demand Hits a 20-Year Low
Unfilled Orders for Consumer Goods, ($ billions, seasonally adjusted)
12
10
8
6
4
2
0
1992
1994
1997
2000
2002
2005
2008
2010
2013
Source: U.S. Census Bureau
been rising since last December.
They currently stand close to the
pre-recession peak. The value
of manufacturers’ shipments of
core capital goods has been rising
steadily since last September.
A disparity in income
growth mirrors the disparity
in spending trends between
businesses and people.
Corporate profits after taxes
have grown almost continuously
since the end of the recession,
interrupted only by a brief
decline at the end of 2010. In
the first two quarters of 2013,
after-tax corporate profits rose
only about 2 percent, but that
comes on top of a spectacular
A disparity of income
mirrors the disparity
in spending between
businesses and people.
4
BUSINESS-CYCLE CONDITIONS
16 percent increase in 2012.
Profits reflect the resources
companies have available once all
costs and taxes have been covered.
Some of that money may be paid
to shareholders as dividends. A lot
of it is retained to finance business
expansions or investments.
With profits at healthy levels
and growing, companies should
have no difficulty financing
investment spending, if they
deem such spending desirable.
People, however, are not
faring as well as businesses.
The rate of growth in real
disposable personal income has
been slowing for more than two
years. Except for a 5.9 percent
increase in income in December
2012 that reflected a one-time
response to anticipated tax
changes, growth of disposable
income peaked early in 2011 at
a 4 percent annual rate. It has
been steadily falling since then.
In June 2013, disposable
SEPTEMBER 2013
Corporate profits
have grown almost
continuously since the
end of the recession.
personal income grew so slowly
that, once adjusted for inflation,
the purchasing power of that
income was lower than the month
before. The increase in July, the
latest month of data, was just
barely above zero. Overall, in the
past 12 months, real disposable
income increased only 0.8 percent.
(Disposable income measures the
money people have after taxes have
been paid and transfers received.)
Wages and salaries, a subset of
personal income, show a similar
pattern. Growth peaked in early
2011 at 5.8 percent and has been
trending down since then. In 12
months to July, this category of
income rose only 3.4 percent.
Wages and salaries exclude
types of income more likely to be
received by the affluent, such as
interest and dividends. As such,
this subset of income better reflects
the experience of most people.
Since population grows over
time, income per person is a
measure that matters more to
families than aggregate income.
Per person income fared even
worse than the aggregates would
suggest. In the past 12 months,
real disposable income per capita
grew a meager 0.06 percent.
Aggregate income is what
supports aggregate economic
activity. Since the recovery
began a little over four years
ago, real disposable personal
income increased 5.9 percent.
This contrasts sharply with
the experience of the earlier
business-cycle recoveries.
Four years after the previous
recovery, which began in November
2001, real disposable personal
income had increased 12.4 percent.
Following the recession that
ended in March 1991, the increase
was 12.8 percent. Following
the deep recession that ended
in November 1982, the increase
was even larger, 18.5 percent.
As a share of national income,
compensation of employees
has been falling since the end
of the current recession. At the
same time, corporate profits
have been rising, both in total
and as a share of national
income. (See Chart 2 above.)
What we see in the data are
businesses investing in equipment
and machinery at a fairly decent
pace, but not expanding hiring
or raising workers’ pay much.
Every month this year, private
employers added less than 200,000
workers to their payrolls, with
a single exception of February,
when 319,000 jobs were added.
This is barely enough to absorb
the population increase.
The growth of average
weekly earnings of production
and nonsupervisory workers
in the private sector has been
stuck below a 2 percent annual
rate for the past 12 months.
Such a slow pace of earnings
Growth in real disposable
personal income has
been slowing for more
than two years.
aier.org
67%
Chart 2. Corporations Flourish, Compensation Lags
Shares of National Income
14%
66%
12%
65%
10%
64%
8%
63%
62%
6%
61%
4%
Compensation of employees, left scale
Corporate profit after tax, right scale
60%
2%
59%
58%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Bureau of Economic Analysis, National Income and Product Accounts
growth was seen only a handful of
times in the 50 years that the data
were collected—in 2009, at the
end of the most recent recession,
in late-2003, in late-1995, and
in 1986. Each of these episodes
was accompanied by a slowing of
GDP growth to below a 3 percent
annual rate, sometimes far below.
All this leaves people with
stagnating incomes, which explains
the pattern of consumer purchases.
The demand for nondurable
necessities, such as groceries,
grows reasonably well, but the
demand for most things people
can do without, such as appliances
and computers, is slacking.
The economy’s engine is running
unevenly, posing a potential danger
to sustained growth.
Business spending and the
everyday spending by consumers
have been enough so far to pull
the recovery along. But consumer
durable goods industries, which
are more cyclically sensitive,
The economy’s engine
is running unevenly,
posing a danger to
sustained growth.
seem to be running out of steam.
Without an improvement in
people’s incomes, the situation
is not likely to change.
People may have increased
their spending as far as their
incomes would allow. This year,
the personal saving rate has fallen
to an average of 4.3 percent of
disposable income, down from
more than 5.5 percent in each
of the previous three years.
The saving rate today is
higher than it was during the
credit-happy years leading up to
the recession. In 2005-2007, it
hovered around 3 percent. But
given that today banks are much
less willing to lend than they were
during the boom, we would not
AMERICAN INSTITUTE FOR ECONOMIC RESEARCH
5
0%
expect, nor would we want, the
saving rate to fall much further.
Without an unhealthy
expansion of borrowing, people
will only be able to increase
demand for consumer goods
when they see their incomes
grow. Businesses, with healthy
profits and cash reserves,
6
BUSINESS-CYCLE CONDITIONS
can continue spending.
Ultimately, however, the only
reason businesses spend is because
they expect consumer demand
to grow. Anticipation of future
consumer demand has to justify
continued business investment. If
growth of consumer demand does
not materialize, businesses will be
SEPTEMBER 2013
quick to cut back on spending.
Consumer spending accounts
for a much bigger part of the overall
economy than does business
spending, Unless its growth
accelerates, GDP is unlikely to
grow much faster than it has been.
Businesses cannot be the sole driver
of economic growth for long. n
APPENDIX. PRIMARY LEADING INDICATORS
2000
Ratio of Manufacturing and Trade Sales to Inventories (3)
M1 Money Supply (1) (constant dollars, billions)
1.0
0.9
1000
0.8
0.7
500
800
0.6
Yield Curve Index (1) (cumulative total)
Vendor Performance: Slower Deliveries Diffusion Index (2) (%)
80
600
60
400
40
200
20
0
100
100
0
Index of Manufacturers' Supply Prices (2) (percent)
Index of Common Stock Prices (2) (constant purchasing power)
880
75
440
50
220
25
110
0
55
Average Workweek in Manufacturing (3) (hours)
160 New Orders for Consumer Goods (3) (constant dollars, billions)
46
44
80
42
40
40
38
20
80
New Orders for Core Capital Goods (4) (constant dollars, billions)
Initial Claims for Unemployment Insurance (3) (1000s, inverted)
160
260
40
360
460
20
560
660
10
2800
New Housing Permits (3) (thousands)
3-Month Percent Change in Consumer Debt (4)
12
10
8
6
4
2
0
-2
-4
1400
700
350
1950
1960
1970
1980
1990
2000
2010
1950
1960
1970
1980
1990
2000
2010
Notes: 1) Shaded areas indicate recessions as dated by the National Bureau of Economic Research.
2) The number in parentheses next to the name of a series is an estimate of the minimum number of
months over which cyclical movements of a series are greater than irregular fluctuations. That number
is the span of each series’ moving aver­age, or MCD (months for cyclical dominance), used to smooth
out irregular fluctuations. The data plotted in the charts are those MCDs and not the base data.
aier.org
AMERICAN INSTITUTE FOR ECONOMIC RESEARCH
7
APPENDIX. PRIMARY ROUGHLY COINCIDENT INDICATORS
256
Nonagricultural Employment (1) (millions)
Manufacturing and Trade Sales (2) (constant dollars, billions)
1200
128
600
64
300
32
150
128
Index of Industrial Production (1) (2007 = 100)
Civilian Employment as a % of the Working-Age Population (2)
66
64
63
32
60
16
57
8
54
12800
Personal Income Less Transfer Payments (1) (constant $, billions)
Gross Domestic Product (1) (quarterly, constant dollars, billions)
20000
10000
6400
5000
3200
2500
1250
1600
1950
1960
1970
1980
1990
2000
2010
1950
1960
1970
1980
1990
2000
2010
APPENDIX. PRIMARY LAGGING INDICATORS
5
Average Duration of Unemployment (2) (weeks, inverted)
Ratio of Consumer Debt to Personal Income (1) (percent)
23
15
18
25
13
35
8
45
3
1600
Manufacturing and Trade Inventories (1) (constant dollars, billions)
% Chg. from a Year Earlier in Mfg. Labor Cost per Unit of Output (2)
16
12
8
800
400
4
0
-4
200
-8
-12
1600
Commercial and Industrial Loans (1) (constant dollars, billions)
Composite of Short-Term Interest Rates (1) (percent)
18
15
800
12
400
9
200
6
100
3
50
0
1950
1960
1970
1980
1990
2000
2010
1950
1960
1970
1980
Business-Cycle Conditions is published
by American Institute for Economic
Research, a nonprofit, scientific,
educational, and charitable or­ganization.
8
BUSINESS-CYCLE CONDITIONS
SEPTEMBER 2013
To contact AIER by mail, write to:
American Institute for Economic Research
PO Box 1000
Great Barrington, MA 01230
1990
2000
2010
Find us on:
Facebook: facebook.com/
AmericanInstituteForEconomicResearch
Twitter: twitter.com/aier
LinkedIn: linkedin.com/company/americaninstitute-for-economic-research
For more information or to donate, visit:
www.aier.org