David Rosenberg of Gluskin-Sheff explains why corporations are sitting pretty right now, and you’re not.
WHERE’S THE INCOME?
Well, it is concentrated at the corporate level. Here is the story. Companies have no reason to hire or pay their workers more because they are sitting on so much idle capacity. So, cost-cutting and productivity gains manage to propel corporate bottom-line performance, hence acting as a critical antidote to lagging revenue growth. Remember, even at the business level, this has been a revenue-less recovery in profits.
Meanwhile, the lack of growth in labour input and compressed wage trends, characteristic of a jobs market gripped with chronic excess capacity, have left the household sector with absolutely no income growth of their own. This is both remarkable and disturbing.
Indeed, personal income actually fell 0.1% mum in September, far below consensus views of a 0.2% increase. The prior month was revised lower as well, now at 0.4% versus 0.5% before. The biggest source of weak income was transfers (mostly jobless benefits), which dipped in September, but wages and salaries were still marginally down as well.
Real personal income excluding government transfers, one of the four critical components of the National Bureau of Economic Research’s recession- expansion determination, was marginally negative again in September: -0.037% mum, -0.003% in August, -0.018% in July. On an annual rate basis, it is down 0.4%, and does seem to have put in a peak in June.
In nominal terms, spending also came in below expected, rising only 0.2% versus consensus view of a 0.4% increase. In real, or volume terms, consumer spending eked out a 0.1% advance. By finishing off the third quarter on such a soft note, there is only 0.6% at an annual rate being “built into” Q4 real consumption.
Also keep in mind that the savings rate fell to 5.3% from 5.6% in August. Absent the drawdown in savings, consumer spending, in real terms, would have actually fallen 0.2% on the month.
Despite the weak U.S. dollar and booming commodity prices, the inflation data remained as tame as tame can be. The core PCE deflator came in flat in September (the consensus was looking for a 0.1% increase). On a YoY basis, the core PCE deflator is now running at 1.2%, the slowest pace since September 2001, before that, June 1998, then you have to go back to June 1965 to see this trend again. The equity market may indeed require Ben Bernanke’s divine intervention, but the bond market has this powerful disinflation trend to support it, not to mention that for every bond bull out there, there are 20 equity bulls.
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