household income and the substitution effect

Yesterday, the Census Bureau released its 2013 annual report on Income and Poverty in the United States.

It showed that median household income in the US was an estimated $51,959 last year, up $180 (whoa, baby!) from the median in 2012.  The 2013 figure is still about 8% lower than the pre-recession level and 8.7% below the all-time peak in household earnings in 1999.

Not a pretty picture, but it brings home how long the period of structural change the US is experiencing has been going on.  Personally (meaning I think so but I wouldn’t bet the farm on being correct), I think it’s no accident that the current wage stagnation began with the emergence of the internet as a major economic force.

In economic theory, and also in practice, people can increase their economic well-being in one of two ways:

(1) they can earn more income, or

(2) they can “upgrade” the basket of goods and services they consume by substituting lower-cost equivalents for the stuff they have typically purchased in the past.

The Census Bureau figures show that door #1 has been closed, on average, for a long period of time.  Therefore, to the degree that people want a higher standard of living, they have had to become adept at strategy #2.

In my experience, during economic expansions people typically try to keep up appearances and hesitate to substitute lower-priced items.   It’s only during recessions that it becomes acceptable to, say, substitute a Hyundai for your Lexus or store brand staples for national brands.

investment significance

It seems to me that in the US stock market, we’ve only begun to see the substitution effect expressed in stock prices in earnest during  the past year (for example, teen retailers, soda and food companies)..  I think there’s lots more to come.  It’s probably easier to identify potential losers than winners.  Just look for high gross and operating margins.  Such companies have the most to lose from price competition; they also may have created “price umbrellas” that allow rivals to undercut them.


The Census Bureau report has two other figures that caught my eye.

–The 5% of American households headed by 15-24 year-olds saw their incomes jump by 10.5% last year to $34,311.  A proxy for Millennials?

–The median income for over 65 year-olds is $35,611.  That’s up by 3.7%, year on year.  But it’s also less than two-thirds of the $57,538 median for 55 – 64 year-olds.  The future for Baby Boom purchasing power?



the US Census Bureau on immigration (and GDP growth)

gauging GDP growth potential

Over the years, I’ve found that there’s a very simple and effective rule for quickly gauging a country’s GDP growth potential.  Here it is:

Output can rise in one of two ways:

–either more people are at work, or

–workers are more productive.

My first boss in the financial markets was as close to a nineteenth-century capitalist as I’ve ever encountered.  He maintained that increasing productivity is solely a function of employees spending more time at their desks.  Although this suited his penny-pinching mentality, it’s not true.  Productivity gains come primarily from the employer investing in better equipment, and from better worker education/technical training.

If we pluck a number out of the air and say that a country can achieve a constant 1% increase in worker productivity per year (I’m not trying to be precise; I want to get a simple picture that gets the general idea.  Also, a 1% annual gain is a pretty good number), then a country’s ability to grow economically becomes a direct function of one thing   …the expansion of its population.

the Census Bureau Annual Population Projections

That’s what makes the Census Bureau’s latest population assessment so interesting.

Two days ago the Bureau, an arm of the Commerce Department, issued its 2012 Annual Population Projections.  It says that in the US, net births/deaths are currently adding about 0.75% annually to the population.  By 2030, that figure will drop to 0.50%.  By 2050, it will shrink to about 0.35%.

Two reasons the figure is so low:  as people become more prosperous, they tend to have fewer children, and people are living longer.

projecting US GDP

So, what’s the trend growth rate of GDP in the US, according to my simple rule?   …2%- per year, or about what we have now.

how to make growth higher

Can we make the economic picture brighter?

Yes, in two ways–both of which, unfortunately, are questions of policy coming out of Washington.

–We can allow foreigners to come to the US to work, either permanently or by increasing the number of work visas awarded to highly skilled foreigners who want employment in the US for a period of time.

Republicans oppose the first,  Democrats the second (for reasons that escape me).

–We can attract productivity-enhancing capital investment to the US.  This is primarily a function of tax policy, which neither party in Washington appears to want to change.

We can also make out schools better.


This isn’t really new news, but thinking about long-term GDP growth suggests, to me, two investment conclusions:

–investors anticipating a rapid expansion of GDP from the current level are likely to be disappointed (look for that in Asia, or from exposure through US-based multinationals), and

–superior earnings growth–and stock performance–will come from companies that have unique products or services that are in high demand.  In other words, the environment favors growth stock techniques rather than value.

(Note:  I realize that it’s not really the population that counts.  It’s the workforce.  But looking at the workforce introduces complications that I don’t think change the overall picture, but which can easily obscure it.  Stuff like:  the influence of the Baby Boom, the decline in female participation, long-term unemployed…)