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The Ongoing Rot

in the Economy
By: Eric Sprott
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While most have been conveniently blaming the tepid first quarter -2.9% GDP growth
figure on the weather, we believe that it is just another symptom of a much deeper
malaise. As we have argued many times before (see, for example, the March 2014
Markets at a Glance), the U.S. economy has been on life support, graciously provided by
Central Planners. However hard they try, they will soon realize that no amount of money
printing can cleanse the rot of the U.S. economy.
Most tellingly, in a recent interview with Reuters, Bill Simon, Wal-Marts Chief Executive
Officer for the U.S., said that Weve reached a point where its not getting any better
but its not getting any worse at least for the middle (class) and down.
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Indeed, if one looks past headline figures, things are not really getting better. As shown
in Figure 1, real disposable income per capita in the U.S. has increased only modestly
since the Great Recession. However, all of this increase is due to Government Transfers,
not from an improvement in the real economy. If we exclude those transfers from the
numbers, disposable income per capita is actually lower than it was at the end of 2005
and has been painfully flat since 2011. Also, those numbers assume that the headline
Consumer Price Index (CPI) accurately represents peoples purchasing power.
In this Markets at a Glance, we investigate the U.S. consumer and show that for a large
portion of the population, things are not anywhere close to being better, in fact they are
worse than before the recession.
www.sprott.com | THE ONGOING ROT IN THE ECONOMY | JULY 2014
JULY 2014
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A H I S T O R Y O F O U T P E R F O R MA N C E

Sprott Asset Management LP Markets at a Glance

www.sprott.com | THE ONGOING ROT IN THE ECONOMY | JULY 2014
First of all, there is income inequality. Those in the top 20% have seen their incomes increase while those
in the bottom 40% have stagnated or even decreased. Figure 2 shows the average after-tax income of U.S.
households by quintiles, as measured by the Bureau of Labor Statistics Consumer Expenditure Survey,
since 2005. It is hard to see from the chart, but in 2012 for the lowest 20% (Quintile 1) of U.S. households,
the average annual after-tax income is $10,171 (up from $9,220 in 2005). Similarly, the next 20% is not
much better off, with incomes averaging $27,743 (up from $25,200 in 2005). By contrast, during the same
period, the average household income for the top earning quintile (Quintile 5) increased 14% to $158,024.
From our calculations, the bottom 40% of the U.S. population receives approximately 12% of the nations
after-tax income, while the highest 20% receives more than 50%. So, because of the wide disparity
between U.S. households, it is grossly misleading to consider aggregate measures to assess the
health of the U.S. consumer. (Note: For the rest of this analysis we combine the bottom two quintiles
(bottom 40%) as they share common characteristics and it facilitates the discussion.)
FIGURE 1: REAL DISPOSABLE INCOME PER CAPITA (INDEX 2005 Q4 = 100)
90
100
110
120
May-14 Jan-12 Jan-10 Jan-08 Dec-05
Excluding Government Transfers Including Government Transfers
Source: Bureau of Economic Analysis, U.S. Census Bureau, Sprott Calculations
FIGURE 2: INCOME INEQUALITY CONTINUES TO WIDEN AFTER-TAX ANNUAL INCOME BY QUINTILE
2005 2006 2007 2008 2009 2010 2011 2012
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Source: Bureau of Labor Statistics - Consumer Expenditure Survey
In light of these disparities and to facilitate the analysis, we have combined the two bottom quintiles
(bottom 40% of households) incomes and expenditures for 2005 (pre-crisis) and 2012 (most recent data
from the Bureau of Labour Statistics). Data is presented in Figure 3.
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Sprott Asset Management LP Markets at a Glance

www.sprott.com | THE ONGOING ROT IN THE ECONOMY | JULY 2014
FIGURE 3: AVERAGE ANNUAL INCOME AND EXPENDITURES
BOTTOM 40% OF U.S. HOUSEHOLDS (QUINTILES 1 AND 2)
Year 2005 2012 % Change
Income
After tax income of which: $17,463 $18,844 8%
Wages and Salaries $9,610 $9,953 4%
Social Security, private and government retirement $6,135 $6,995 14%
Unemployment and workers compensation, veterans benefits $159 $321 102%
Public assistance, supplemental security income, food stamps $669 $936 40%
Note: Government transfers as % of after tax income 40% 44%
Expenses
Food $3,557 $4,000 12%
Shelter $5,131 $6,253 22%
Utilities, fuels, and public services $2,285 $2,580 13%
Transportation $4,049 $4,451 10%
Health Care $1,893 $2,230 18%
Other $7,109 $7,854 10%
Total $24,024 $27,368 14%
Expenses as a % of after tax income
Total of which: 138% 145%
Food 20% 21%
Shelter 29% 33%
Utilities, fuels, and public services 13% 14%
Transportation 23% 24%
Health Care 11% 12%
Total non-discretionary spending 97% 104%
Source: Consumer Expenditure Survey, 2012, 2005 & Sprott Calculations
The first panel of Figure 3 shows after tax income for the bottom 40% of households in 2005 and 2012,
along with a breakdown of some of its components. All figures are in current dollars (i.e. not adjusted for
inflation). Not too surprisingly, average after-tax annual household income increased by a meagre 8%, from
$17,463 to $18,844. Wages and salaries, which represent about half of income, increased only 4%. Most of
the increase has been in the form of government transfers; social security increased 14%, unemployment
and veteran benefits 102% and other forms of public assistance 40%. In fact, of the $1,380 increase in
average after-tax income, 93% comes from increases in government transfers.
The second and third panels of Figure 3 show average annual expenses in dollars as well as in percent of after
tax income. We also show a breakdown of spending for categories that we consider non-discretionary, in
the sense that they are unavoidable expenses such as food, shelter, utilities, health care and transportation.
Perhaps the most striking (but not that surprising) finding from that table is the fact that 40% of U.S.
households spend about 40% more than they make (138% and 145% in 2005 and 2012, respectively)! In
case you wonder how a household can spend more than it earns, there are many ways such as: borrowing,
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Sprott Asset Management LP Markets at a Glance

www.sprott.com | THE ONGOING ROT IN THE ECONOMY | JULY 2014
selling assets, assistance from family, etc. While incomes increased only 8%, total expenses increased
14%, driven by very large increases in shelter (22%) and health care (18%) spending.
Additionally, an ever increasing proportion of peoples after tax income goes towards what we call
non-discretionary spending. As shown at the bottom of Figure 3, in 2005 those households used
to spend 97% of their income for basic necessities, while in 2012 this has increased to 104%.
Five years into this so-called economic recovery, on average 40% of the poorest U.S. households
still spend more than they earn (including government transfers) for basic necessities!
We believe that there are two main reasons for this. The first one has to do with income inequality;
as we have shown, incomes have been almost constant since 2005, with most of the increase driven
by unsustainable governmental assistance. Furthermore, prices for basic necessities, which constitute
the entirety of these households budgets, have been increasing at a steady pace. Figure 4 shows the
reported price over the past 7 years for energy, food commodities and rents against the Official Headline
Consumer Price Index (CPI).
Over that period, overall price levels, as measured by the CPI, went up 22% (versus 8% for after tax
incomes). However, for the same period, rent, energy and food prices increased 26%, 54% and 115%,
respectively. No wonder those same households spend 33% of their income on shelter, 21% on food
and 14% on utilities and fuels!
ENDNOTES
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http://www.reuters.com/article/2014/07/08/us-walmart-simon-idUSKBN0FC2GW20140708
How can we have an economic recovery when there is barely any discretionary disposable income for
40% of the population? As we have shown above, those that have seen their incomes grow and not the
ones most likely to spend, while the bottom 40% of households still rely heavily on government assistance,
have had stagnant incomes and have been faced with increasing inflation for non-discretionary goods that
constitute a very large share of their incomes.
There is clearly no recovery
FIGURE 4: THE PRICE OF BASIC NECESSITIES IS WELL AHEAD OF OFFICIAL INFLATION
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Average Gasoline and Electricity Prices
Commodity Research Bureau BLS/US Sprott Foodstuff
U.S. Census Bureau Rents Index
Headline CPI
80
100
120
140
160
180
200
220
240
260
Source: Bloomberg, Sprott Calculations
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