THE ZEITGEIST: SEPTEMBER 19, 2016
A GOOD YEAR FOR MIDDLE AMERICA
According to the latest annual Census report on income and poverty, 2015 was a very good year for the typical household. After declining for seven straight years since 2007, real U.S. median household income jumped by 5.2%. Coming after the longest negative growth stretch ever recorded (since the Census first started this series in 1968), this latest one-year climb is the biggest ever recorded. Census has given the last three years an artificial boost by redrafting their questionnaire, which causes an upward break in the series from 2012 to 2013. But this still leaves 2015 trailing several earlier years. The real median income figure in 2015 ($56,516) remains roughly $1,000 below its peak in 2007. It also remains slightly below what it was 1999, 2000, and 2001—at the peak of the prior business cycle.
Nearly every demographic group—by age, race, region, and income bracket—shared in the jump. Core urban areas were up (+7.3%), while the most rural counties actually regressed (-2.0%). Late-wave Gen-Xers age 35-44 did especially well (with a +7.0% gain). Late-wave Boomers age 55-64 did less well (+3.5%). The West did best (+6.4%), the South worst (+2.9%). Noncitizens gained by +10.5%, due to the ongoing decline in newly arriving illegals and the rising influx of skilled workers and affluent students on visas. The poverty rate also declined significantly, from 14.8 to 13.5%, the biggest yearly decline since the 1990s. By the Census’ estimates, the biggest gainers were in the lowest 20% income bracket and in the highest 5%.
The cause of this good news? Well, partly it was somewhat better GDP growth in 2015: at 2.6%, it was not great but better YoY than any year since 2006. And partly it was a boost in the share of GDP going to workers, generating a 1.4% real gain in compensation. Most importantly, the dramatic decline in both energy and food prices suppressed the PCE deflator and gave households a big “real” purchasing power gain.
Though federal agencies to do not calculate separate deflators for different income brackets, it’s reasonable to assume that the gas and food price drops disproportionately benefited lower income groups. From 2014 to 2015, according to the JP Morgan Chase Institute, the lowest quintile spent 1.4% less of their income on gas while the highest quintile spent 0.4% less. More generally, the Institute’s analysis of credit and debit card spending shows that older and more affluent households showed the weakest consumption gains in 2015 and younger and less affluent households showed the strongest gains. Small wonder that, since Q3 2015, firms like WMT have been surprising mostly on the upside while firms like TIF surprised mostly on the downside.
What’s ahead for 2016? Almost certainly, household income growth gains will come nowhere near last year’s performance. For starters, YoY GDP growth will very likely be weaker this year. And the big boost from declining gas and food prices will disappear—indeed, it may even turn into a drag. Monthly estimates extending through July of 2016 conducted by Sentier Research shows that median household income may already have fallen by at least 1.0% this year since peaking in January.
THE CPI AND THE LONG BOND
Last Friday’s CPI report generated titters of concern about accelerating inflation—and reinforced the bearish outlook on TLT. I don’t buy it. The MoM numbers (0.2% overall, 0.3% core) are not out of bounds, and the YoY number remains very low, in the 1.0% range.
What’s more, the recent CPI results have recently been skewed by steep medical price hikes which reflect out-of-pocket spending only. Here, in other words, we are dealing with the poor souls buying Epi-Pens for $300 each rather than the majority of Americans who (through insurers) get them for around $100 each. The PCE deflator, which includes all medical purchasers, is not showing this accelerating medical inflation. And in July, the PCE deflator weighed in YoY at 0.79%. Keep in mind the comps here: In July 2015 falling crude oil prices were already approaching $50.
Near-term expectations data, as summarized by the Cleveland Fed, are also not showing much change. The 5-year ahead breakeven rate, now at 1.3%, has been trending downward since March. With the U.S. economic indicators recently surprising on the downside, few investors can be worried about an incipient growth surge. The market consensus is that the Fed will do nothing until after the election.
So what can explain the rise in the 10-year TIPS breakeven over the past 90 days? And perhaps the catch-up rise in 10-year yields over the past 30 days? Clearly long-term inflation expectations are rising, but this rise is being driven entirely by expectations beyond 5 years. Since the GFC, the 5-plus breakeven has generally been around 0.5 to 1.0% higher than the 5-minus breakeven. Investors assumed that the economy would eventually “recover” and inflation would bounce back to some extent over the long term. During 1H 2016, anomalously, that optimism collapsed and the 5-plus and 5-minus numbers merged. Now they are pulling apart again.
So what has happened since last July to cause investors to change their minds again about long-term outcomes? Let me suggest two things. First, there is the perception that global monetary policy has reached its endgame and that NIRP cannot be pursued much further. This sweeps away a scenario which seemed all too possible last spring: endless ECB and BOJ rate cuts, endless euro or yen carry trade into the US, and endless US $ appreciation. Second, there is the growing probability that in future years, no matter who wins the 2016 election and no matter what the rest of the G20 does, America is heading politically toward a new regime of substantial fiscal stimulus.
Yet beware: All this hedging against new prospective inflation risks remains tentative. There is still little current data pointing toward inflation. And any further deceleration in the U.S. economy—especially if the Fed hikes rates into bad news—could put longer-term inflation risks on hold for a while.
NOW IT'S A RACE
Who would have guessed that the Donald could put in a stellar appearance on Jimmy Fallon’s Tonight Show—watched by millions of college-educated Millennials? It’s been another good week for Trump. With two new surveys giving him the edge nationally, he has cut Hillary’s lead on RealClearPolitics to only 0.9% points. Election odds now range from 73-27 for Clinton on the NYT’s Upshot to 60-40 on Nate Silver’s FiveThirtyEight. The superforecasters’ market at Hypermind puts the odds at 58-41. Most betting markets are around 65-35.
At the state level, Trump has an emerging poll lead in Florida and Ohio and is now neck-and-neck in North Carolina, Nevada, and Colorado. All of these are states he probably needs to win—especially if he doesn’t gain ground in Virginia or Pennsylvania.
Last spring, I suggested that Trump was likely to veer way to the left of other recent GOP candidates in promising to spend federal money to either to assist Americans in need or to get them jobs. This week he showcased both themes. He filled in the details on his program to help parents pay for childcare (this time including a refundable tax credit for low-income families) and outlined a federal guarantee for six weeks of maternity leave for any employed woman. While both proposals were heavily panned by Democrats and by the media generally, they helped remind the electorate that Trump is no ordinary Republican—which was no doubt his intention. Meanwhile, Trump continues to draw the ire of GOP leaders by trying to outbid Clinton on how much he will spend on infrastructure.
The first candidate debate is Monday, September 26—eight days from now. The stakes are huge. Many Democrats will fret over Clinton’s higher expectation bar and worry that she may not be fully recovered from her pneumonia. Many Republicans will also be holding their breath, fearing that Trump may ruin his entire campaign in just one moment of outrageous ignorance or vulgarity. Quite literally, anything could happen.
- U.K. writer Charlotte Gill debunks Millennials’ “yolo” spending habits, and claims that deep down, older people know that the issue is not getting Millennials to save more, but getting them more money to save. After all, “A cup of coffee or a mortgage shouldn’t be a choice; in better decades, you could have had your cake, eaten it, and bought a house.” (The Spectator)
- Forbes contributor Anna Sofia Martin highlights how Xers have transitioned from generational underdogs to powerful individuals over the years. Her warning is spot on: “They quietly have become residents of the C-suite, your friends, moneymakers, and spenders. Ignore them at your peril.” (Forbes)
- Author Joel Kotkin argues that Boomers’ destruction of the economy and toxic political divisions will be their legacy. But there is some hope: Millennials’ rejection of “the Boomer plague” suggests that forthcoming generations may have a future after all. (Orange County Register)
- Transportation experts are up in arms over Uber’s new pilot program, which allows consumers in Pittsburgh to hail a “driverless” Uber vehicle. Not to worry: Each car includes a “safety driver”—and given the severe limitations of driverless tech, it will take far longer than expected for Uber (or anyone else) to go fully autonomous. (The Washington Post)
- A new Mintel survey finds that Millennials are more likely to be pet owners than their generational predecessors—with 71% of men and 62% of women between the ages of 18 and 34 claiming dog ownership in particular. It should come as no surprise that the generation that grew up with “family pets” continues to keep furry companions by their side as they enter adulthood. (The Washington Post)
- With retirement looming ever closer, financial services writer Cyril Tuohy thinks Generation X needs a wake-up call (and maybe a shoulder to lean on). Despite being in a hectic stage of life, Xers can’t keep withdrawing from their 401(k)s or waiting for an inheritance—Tuohy is right that they could use an advisor, and they definitely need to start saving now. (InsuranceNewsNet)
- The number of Airbnb hosts over age 60 doubled from March 2015 to March 2016. More and more Boomers are leveraging their empty nests and using the service to supplement their income—a trend that will only ramp up as less-affluent, last-wave Boomers near retirement. (Airbnb)
- A recent study shows that Millennials are the generation most comfortable discussing finances with their significant other. Coming of age in the wake of the Great Recession and saddled with student loan debt, more young people than ever are strapped for cash—making it not at all surprising that 74% of young couples discuss money issues weekly. (TD Bank)
- Contributor Felix Morgan asserts that Homelanders’ closest generational parallel is the Silent, not Millennials. While the birth years she uses are a bit off, she correctly points out that both the Silent and Homelanders were shaped by a major global financial crisis that occurred in early childhood. (The American Genius)
- Alphabet’s Project Wing team and Chipotle began testing out burrito deliveries by drone at Virginia Tech this week. Although the rules surrounding commercial drones are still up in the air, it looks like the tech giant is one step closer to a future of drone-delivered goods. (The Roanoke Times)
Residents Ask for a Second Opinion. Four Harvard Medical School-affiliated hospitals have developed new “escalation-of-care” policies that coach new medical residents to ask veteran doctors for help more often. The initiatives come in response to studies showing that residents often fail to ask for assistance due to overconfidence, lack of knowledge, or fear of seeming incompetent. Further exacerbating residents’ fears is intimidation by senior physicians. To resolve this issue, hospitals are taking a generational approach: Hospitals are not only issuing new residents pocket cards listing 15 situations that require a senior colleague’s opinion, but are also encouraging older doctors to offer that help more readily. For Millennials who have always turned to authority figures for guidance, these policies are common sense. While older doctors may roll their eyes at treating Millennials with kid gloves, surgeon and researcher Atul Gawande says that chiefs of surgery make it clear that they “really expect [older doctors] to take the call and not bite anybody’s head off.”