Economic Over-Performance, Increased Personal Income & More


Usually the gap between GDP and potential GDP (what GDP would be if all economic resources were fully utilized) is very small. However, during 09Q2, the gap hit $935 billion; 6.5% of GDP. That was the largest gap since 82Q4 when it hit 7.9%. Since mid-2009 the gap has steadily shrunk and is now actually negative, meaning the economy is over-performing! This is why inflation is expected to rise.


The non-partisan Congressional Budget Office forecasts that the recently passed deficit-financed tax cuts and spending increases will boost the national debt by $1.9 trillion through 2027. Thus, debt held by the public will rise from 78% today to 96.2% of GDP by 2027 compared to 91.2% before the latest fiscal changes and higher than any time since 1946. Until now, debt/GDP ratios this high only occurred during recessions or wars.


While it’s often reported that US median income has barely budged in inflation-adjusted terms since 1979, new data show median income up 51% since 1979 to $73,200 due to three factors: First, household size is shrinking. Second, the new results study after-tax income and include more complete measures of government assistance. Lastly, the Personal Consumption Expenditure (PCE) index was used to determine the numbers, which is a more comprehensive and accurate measure of inflation than the Consumer Price Index (CPI).


As house prices relentlessly rise, the percentage of conventional loans this past winter going to borrowers with debt-to-income (DTI) ratios above 45% hit 20%, almost triple what the percentage was 12 months ago, but less than the housing boom peak of 36%. Meanwhile the share of buyers with DTIs between 46% and 50% is near where it was in 2004-05 but remains well under the 2007 top.


Despite being a train wreck heading into 2017, Europe is enjoying an economic upswing. The Eurozone grew 2.5% in 2017, its fastest rate in a decade, and on par with US growth. This surprisingly strong progress has pushed the euro up 17% against the dollar. Moreover, French business confidence is near its best since 2007, Greek, Italian, and Portuguese credit was recently upgraded, and much of Eastern Europe is booming!


In 2017, the IRS audited 1 of every 160 individual tax returns, the lowest percentage since 2002, and the sixth straight year of declines. Overall audit probabilities peaked in 2010 at 1 in 90. For millionaires, the audit probabilities are 1 in 23, down from 1 in 8 in 2010. And remember, for you late filers, the IRS only takes checks for up to $99,999,999.99; what a pain!

Source: Elliot Eisenberg, PhD., Chief Economist for GraphsandLaughs, LLC, an economic consulting firm serving a variety of clients across the United States. All rights reserved.

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