I received an email today from TrimTabs regarding their Consumer Spendables Index and a new measure called Dependency Ratio II

The Consumer Spendables Index consists of three components.

  1. Cash Extracted from Real Estate
  2. After Tax Income from Other Sources
  3. After Tax Income from Wages and Salaries

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TrimTabs reports …

The Federal Reserve discontinued its data on cash-outs in Q3 2008, but we use another source of refinancing data from Freddie Mac to estimate cash-outs and thus consumer spendables.

According to the Fed, cash-outs peaked at $804 billion in the four quarters ended in Q2 2006 (we refer to four-quarter periods to smooth quarterly volatility). At that time, cash-outs were equal to 13.6% of the $5.9 trillion in after-tax income. We estimate that cash-outs amounted to only $62 billion in the four quarters ended in April, down $742 billion, or 92.2%, from the peak.

Consumer spendables peaked at $7.06 trillion in the four quarters ended in Q4 2007, more than a year after cash-outs began to decline. Then consumer spendables began to decrease, bottoming at $6.06 trillion in Q2 2010. In the past year, consumer spendables rose an estimated $245 billion, or 4.0%, to $6.31 trillion. This increase is not impressive given that it was accompanied by the payroll tax cut and $1.5 trillion in federal deficit spending.

Note that the recession ended in the second quarter of 2009. The Consumer Spendables Index is below that point now. Moreover, it has taken three full years (12 quarters) for the Wages and Salaries component to match the pre-recession high.

This is in spite of record amounts of fiscal stimulus by Congress, and record amounts of liquidity maneuvers including two rounds of Quantitative Easing by the Fed.

TrimTabs Dependency Ratio II

TrimTabs is alarmed by the rapid rise in government benefits and has a new calculation to measure consumer dependency on government.

From TrimTabs ….

We have been alarmed at the rapid growth in government social programs. Several months ago, we introduced the TrimTabs Dependency Ratio, which compares income from government social benefits to income from wages and salaries. The ratio increased from 9% in 1960 to 36% in March.

We are introducing the TrimTabs Dependency Ratio II, which adds income from government wages and salaries to income from government social benefits and compares it to income from wages and salaries. This modified ratio rose to 66% in March, from 33% in 1960 and 45% in 2000.

The principal driver of the increase in TrimTabs Dependency Ratio is the rapid rise in government wages and salaries and social benefits over the past decade. From 2000 to 2010 private sector wages and salaries grew 29%, whereas government wages and salaries plus social benefits grew 89%, nearly three times the growth rate of private sector wages and salaries.

The government is playing an increasingly dominant role in the economy by borrowing massive sums to fund social welfare programs. This borrowing is financially unsound if not morally wrong. Instead of creating new wealth, it is simply piling more debt on an economy with the same capacity. At some point, the carrying capacity of the economy will be exhausted. We believe the economy is at or near that point.

Transitory Inflation

TrimTabs offers this assessment of Bernanke’s claim regarding “Transitory Inflation”

The increase in food and energy prices reduced cash available to spend on non-essential items—consumer items excluding housing, food, transportation, or health care—by 3.5% to 5.2% for low- and middle-income earners and 1.6% to 3.6% for high-income earners. We estimate that the increase in food and energy prices is reducing cash available to spend on non-essential items by $200 billion to $260 billion annually, which offsets most of the $114 billion stimulus from the payroll tax cut and the $245 billion increase in consumer spendables.

We are troubled by the Fed’s focus on core inflation. Since core inflation is only 1.3% y-o-y, the Fed assumes that soaring food and energy prices are transitory and therefore unimportant. In our view, something transitory lasts no longer than a few months, but the run-up in food and energy prices began last summer. While the Fed may consider a 10% annualized increase in food prices and a 70% annualized increase in gas prices transitory, these increases are reducing discretionary income and slowing economic growth. If food and energy prices do not retreat, they could tip the economy into recession.

Thanks to TrimTabs for those excerpts. There are eight additional charts in the 15-page report I did not cover.

In regards to TrimTabs’ statement on recession in the last paragraph above, I agree. In fact, I think another recession is already baked in the cake.

For more details on the slowing global economy please see Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected.

Mike “Mish” Shedlock
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