Saturday, July 30, 2011

Real Growth Since 1952

Click to enlarge.

As can be seen in the chart, real GDP is very highly correlated (r-squared = 0.9975) with real wages and other labor income. Correlation does not guarantee causation but in this case I'm willing to make that leap of faith.

An optimist would argue that since there is now a divergence between the two, real wages will most likely rise to match GDP. A pessimist would argue that GDP will fall to match wages. Oh how I wish I was an optimist.

Now let's add corporate profit growth and civilian employment growth to the chart.

Click to enlarge.

An optimist would argue that corporate profit growth should match wage and/or GDP growth over the long-term. Corporate profits are therefore fully rational right now. A pessimist would argue that corporate profit growth may just be tracking the civilian employment growth line over the long-term. It certainly appeared to be doing that from 1952 to 2001 (and for a brief period in 2008). Oh how I wish I was an optimist.

Now let's add the real growth of household and federal debt. Drum roll please!

Click to enlarge.

An optimist would argue something no doubt. I'm just not sure what. A pessimist would be jumping up and down while exclaiming profanities about what our true growth engine has been. Oh how I wish I was an optimist!

Source Data:
FRB: Flow of Funds
St. Louis Fed: Federal Government Debt
St. Louis Fed: Household Credit Market Debt Outstanding
St. Louis Fed: Civilian Employment
St. Louis Fed: CPI


Jerry Critter said...

Interesting! While we seem to be overly concerned about the Federal Debt, little concern seem to be given to personal (household) debt. In fact, many people are saying that government finances should be handled like household finances.

Based on your last graph, I would say that the government has been doing a much better job of handling its finances than has the American household.

Stagflationary Mark said...

Jerry Critter,


Household debt started from a very small amount in 1952 but had a much larger growth rate,

Total household debt was just $84.3 billion in the first quarter of 1952 (not adjusted for inflation).

It peaked at a staggering $13.9 trillion in Q1 of 2008. That's a 16,400% increase (not adjusted for inflation).

If that's the model the government should live by, then we're in a heap of trouble.

(We are actually in a heap of trouble. Perhaps I should have said that we'd be in an even bigger heap of trouble, lol. Sigh.)

Stagflationary Mark said...

Bonus thought.

There is no guarantee that corporate profits have to grow at all. In theory, they could even go to zero and stay there for an extended period.

Karl Marx predicted corporate profits would eventually be squeezed to zero as competition intensified. His theory hasn't worked so far but it kind of makes sense if you think about it. If you see someone making money selling widgets then you might be tempted to sell widgets too.

Just look at all those tablets heading our way.

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. - Warren Buffett

One wonders where corporate profits would be right now without the government's support. We are borrowing trillions to keep this party going.

GawainsGhost said...

Hey, Mark, check this guy out.

Mr Slippery said...

Great post! I think "Oh how I wish I was an optimist!" would be a great title for a children's book. You've got half of it written already.

You can see the Karl Marx margin squeeze in parts of the economy where there is competition and a free market. Marx didn't factor in government supported monopolies, duopolies, and cartels.

Stagflationary Mark said...


I get the feeling that I'm gonna pay! ;)

Stagflationary Mark said...

Mr Slippery,

I actually started off titling this post "Oh How I Wish I Was an Optimist!" based on the charts I had made but decided to rename it something more practical. Go figure!

You have given me another book idea though.

Illusion of Prosperity: A Pop-Up Book

I think it would be fun to see things like the housing bubble, trillion dollar debts and deficits pop up at you. Oh yes! Fun!

The Pop-Up Book: Step-by-Step Instructions for Creating Over 100 Original Paper Projects

They have a magical appeal as they mysteriously fold and unfold.

The same can be said of banking businesses that repeatedly fold and unfold! So mysterious!

There will also be a companion CD of course.

Fly Profits Fly

getyourselfconnected said...

Wages are not going up anytime soon.

tj and the bear said...

Excellent charts, Mark.

Oh how I wish I was an optimist (too).

Stagflationary Mark said...

GYSC & tj and the bear,

It would seem that I'm preaching to the non-optimist choir.


Stagflationary Mark said...

Scary bonus thought:

You will note that I have not claimed that I am a pessimist. I simply believe that I am not an optimist.

If I was a pessimist then some of my fears would not come to fruition. To date, nearly all have.