Invictus is a street insider, a long-suffering “lifer” whose close work with Wall Street research teams gives him unique insight into the current strategist spat.



It was noted back in October that a feud seemed to be simmering between the former Merrill Lynch Chief North American Economist David Rosenberg (now at Gluskin Sheff) and those who succeeded him, Economist Ethan Harris and Strategist David Bianco (who replaced Rich Bernstein).

Often nuanced in nature and discernible only to those who read the research from both shops, the differences occasionally bubble to the surface, as they have in the past few days.  The nub of it, obviously, is that Rosenberg’s outlook is decidedly dour, in sharp contrast to his successor(s), who are much more bullish.

So nuke another bag of popcorn, as the gloves appear to be coming off.

In a research note last week, Bianco asserted that it is an “investor misperception” that the consumer (PCE) is really 70% of U.S. GDP:

Personal Consumption Expenditures (PCE) do indeed make up about 70% of US GDP, making total US PCE or household spending about 15% of the global economy and bigger than the entire Chinese economy (Chart 2). How then can the US economy and the rest of the world grow with the US consumer in retrenchment? To answer that, we take a closer look at the composition of PCE.

Only 25% of personal consumption is discretionary spending

What many investors fail to realize is that the majority of PCE is not made up of iPods, handbags and dinners at the local Outback Steakhouse. Instead, about 75% of household spending is non-discretionary in nature, such as housing, healthcare, energy, food eaten at home and other household staples. We think it is worth noting that most of these non-discretionary items are made in the US.

While there is certainly room to reduce non-discretionary spending, the areas of consumer spending feeling the brunt of higher household saving rates are cars, travel, apparel, restaurants and other discretionary items that make up about 25% of PCE, equivalent to 20% of US GDP (Chart 3) or less as many of these nondiscretionary items are imported. 20% of US GDP is still significant, but far less than the 70% figure that makes the headlines. Another figure sure to make the headlines this time of year is retail sales. The contribution to US GDP from retail sales has actually been declining for over ten years. Excluding supermarkets, retail sales are under 40% of total consumption, or about 25% of GDP.

Bianco’s piece was referenced in last Saturday’s Barron’s.

On Monday, Rosenberg was having none of it:

The “Streetwise” column in the current edition of Barron’s (It’s Still Too Early to Worry Too Much) runs with a series of assertions otherwise dubbed “common misperceptions” — one of them being that the U.S. consumer is really not 70%+ of the economy because “only a quarter of it is truly discretionary.”

We’ll get back to this in a second, but the fact of the matter is that much of what appears to be non-cyclical is in fact, cyclical (like elective surgery in health care; veal chops in the food category, etc). Second, even if this assertion is correct that ‘only’ 25% of consumer spending is economic-sensitive, it begs the question as to why that is important in anyone’s analysis. Is 25% small? If it is, then what is going to be the driver for the economy going forward; government spending? If 25% is small, then how is it that on average consumer spending manages to generate 300 basis points of growth for the economy coming out of recessions — because they are buying more soap and toothpaste with the other 75%? Maybe that 25% (and that number is not correct but it doesn’t matter in any event) is a huge swing factor in recessions and expansions for overall GDP growth. Once again, this is a classic failure to assess the economic shifts at the margin.

Even if consumer discretionary spending is just 25% of the total expenditure pie (and hence 17.5% of GDP), that would still make it the largest cyclical component of the economy — almost double capital spending and exports, just as an example, and almost eight times larger than housing and commercial construction.

Stay tuned.  I expect this one’s not over by a longshot.

Category: Analysts

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “When Economists Collide – Part II”

  1. bsneath says:

    Both economists make good points. That is what makes divining the future of the economy so difficult.

  2. Byno says:

    This debate is long on bluster and short on rigor.

    25% of whom? Is that an average ala Bill Gates and the bar full of firemen? [BR: All US Consumers]

    75% of American families make less than 75k/yr according to the census bureau. Furthermore, the BLS tells me that the average American family spends 17k/yr just for housing. In fact, food, transportation, housing and healthcare account for 75% of the average family’s annual expenditures. What about insurance and hair cuts and clothing and student loans and cable and 401ks and cell phones etc ad nauseum?

    It’s not enough that this duel is vapid; it’s also lazy research on the authors’ parts.

  3. comet52 says:

    I’m not sure I buy either of them. It appears that what’s needed is a much more rigorous analysis of what consumer spending is and is not. A CNN-style poop-tossing contest won’t really get us there.

  4. Marcus Aurelius says:

    they talk of spending when they should be talking about credit and debt. The American consumer is nutered without more debt.

  5. Rob Dawg says:

    It is over. Rosenberg wins by knockout. At that he is being kind to accept 25% of PCE as being discretionary at face value. As the mortgage lenders and municipalities have learned most painfully the modern consumer seems to treat even debt repayment and taxes as being discretionary. Even healthcare. Our plan changes in January are causing my family to switch from top tier to second tier. Technically between contributions employer+employee we will be paying less thus showing there is elasticity to be found in the 75% Bianco considers a fixed cost. Don’t even get me started on cars, washers, other consumer durables.

  6. Mannwich says:

    @Rob Dawg: My wife and I did the SAME thing with our health plan – we traded down. We’re also holding off on several big purchases like a car, refrigerator, oven, and dishwasher (the latter three being very old too, but still functional) for the foreseeable future.

    The only thing we did do was replace all of our second floor windows using the $1,500 Energy Star tax credit. Thank you very much, Timmay-bucks.

  7. bsneath says:

    I’m leaning towards the Rob Dawg conclusion.

    I too have reduced a number of “fixed costs” myself, mainly in the insurance, finance, telecom and household services sectors and plan more. It turns out that many fixed costs really are not that fixed.

    An interesting read on the real economy is railroad car loadings – chart over at CR. Both total loadings and inter-modal loadings are about 85% of 2007 levels. This indicates to me that the real economy, even with the artificial stimulus measures, is about 85% of what it once was. And once the artificial stuff goes away?????

  8. Transor Z says:

    First of all, retail ex groceries is moronic.

    A lot of what Bianco wants to characterize as non-discretionary are household expenses that are scaled to income. True, consumption of things like oxygen, water, food calories, shelter and heat are non-negotiable below a certain threshold. But that’s stupid disingenuous analysis.

    As Rosie shorthands it, food scales between Kraft Easy Mac and veal cutlets. Housing choices scale between steam heat-included/ absentee-slumlord/firetrap family of four crammed into 1 BR and less than 1000 sq feet to nicer digs. Energy costs are closely associated with housing choice.

    As Manny notes, health care choices are scalable and indeed most large employers offer different choices, scaling from VPI Pet Insurance to blue chip PPO.

    Household sundries, same thing: generic vs name-brand. Clothing? Same.

    I am so sick and tired of these motherfucking snakes on this motherfucking plane bad-faith analyses that never start with a model household budget.

  9. Transor Z says:

    Should have been:

    I am so sick and tired of these motherfucking snakes on this motherfucking plane bad-faith analyses that never start with a model household budget.

  10. Rob Dawg says:

    “I too have reduced a number of “fixed costs” myself, mainly in the insurance, finance, telecom and household services sectors and plan more. It turns out that many fixed costs really are not that fixed.” – bsneath

    Telecom, especially bundling companies are entering into an underground price war. When you are offering intro rates for the first six months of a 12 month commitment that isn’t an intro rate anymore. Look for this to be the next deflationary breakout as consumers rightsize their bandwidth and content consumption.

  11. bsneath says:

    Thanks Dawg. My Verizon bundled contract expires this month. I’ll look into my options. (I should cancel the internet service so I can get a life back!!!)

  12. Transor Z says:

    Re: telecom

    And then you’ve got the category of discretionary spending folks treat like it’s fixed. I’ve seen many a Geek Squad truck parked in front of the PJs.

  13. bsneath says:

    Dang TZ, I’m an old fart. Had to go to the urban dictionary to find out what a “PJs” is. Got it.

  14. I went to the URBAN DICTIONARY and still dont know what PJs means !@

  15. Bokolis says:

    I grew up across the street from the PJs, so I know that location and square footage are discretionary, I know the type of shit you buy at the supermarket- to say nothing of whether you choose to clip coupons and pack one of those club cards- is discretionary, and what type of coverage you get, unless mandated, is surely discretionary…to say nothing of whether you rock Canali or Karako suits; True Religion or Levi jeans.

    Bianco must have had someone sit in for him in Sociology 101…you know, where they took all those things you thought were natural and showed that they are choices you make based on your indoctrination (I don’t know what was said after that because I was in the quad playing soccer for most of the rest of the semester). For that matter, it looks like Bianco was doing the same during his Economics classes. Granted, the way they teach it renders it junk science. But, as Carlito explained, if you can’t see the angles no more, you’re in trouble.

    That said, I’ve always thought that the average wage slave (not unlike myself…I wasn’t just ditching Soc; I was at the track during Poli Sci) is hemmed into about 90% (hence, the slavery) of his expenditures. In my own defense, I save 30% of my take-home (excludes the non-Roth portion of my 401k); I’d overshoot on the other side. But, I am an expense manager, not your average wage slave.

  16. FrancoisT says:

    Even if consumer discretionary spending is just 25% of the total expenditure pie (and hence 17.5% of GDP), that would still make it the largest cyclical component of the economy — almost double capital spending and exports, just as an example, and almost eight times larger than housing and commercial construction.

    By factoring in the relative importance instead of the absolute number, we hereby declare this round a win for Rosie.

    J’ai dit!

  17. Mannwich says:

    I would add the personal spending habits are sticky. People won’t change their habits until reality is FORCED upon them (generally), but it’s quite surprising to find out just how much one can “do without” or trade down when they really take a good look at one’s expenses. Bye bye cable TV, home phone (have a cell now, who needs a home phone), expensive wine and beer, eating out, ballgames, those extras at the grocery store, that new winter coat (the ones in the closet look just fine, thanks), new boots, hats, gloves, scarves, sneakers, yada, yada, yada, the list goes on and on and one.

  18. Darkness says:

    People are trading down. Every time I drive by the large Salvation Army store and facility in our city, I’m amazed at how packed the parking lot is. This started 2 months ago, at least, and isn’t just the holiday shopping season. Craigslist, classifieds, salvation army, we have a lot of excess junk in the system that can be passed cheap on to the next desirous owner without having to manufacture and retail new Things.

  19. Bokolis says:

    All I know is the parking lots of the steakhouses in Syosset- even on a Monday or Tuesday night- are packed.

  20. bsneath says:

    Must be all those folks from the Syosset PJs!

    btw, where is Syosset?

  21. Mannwich says:

    @Bokolis: But of course. Isn’t Syosset in NY? Wall Street’s doing just fine. Never better. Record bonuses.

  22. Bokolis says:

    Syosset is in NY, but nowhere near the PJs. For that matter, the PJs (and, let’s throw Canarsie in there for kicks) are not what they used to be around here. But, I suspect that, since minorities are no longer able to get credit, they are about to get a lot more pissed off.

  23. flipspiceland says:

    What appears to be the situation is that people cannot do enough work, or enough high paid work to not have to be overly concerned about expenses.

    The ability of families to earn more is hemmed in by the fact that there has been a dearth of good-paying jobs in all but government.

    This appears to be a semi-permanent condition absent some inventions that will require millions of new employees. Retirements of baby boomers will not be sufficient to absorb our increased population. Those jobs may permanently disappear.

    Bottom line? Too many people chasing too few high paying opportunities and having no bargaining power with less and less employers to choose to work for, or who need them.

    This cannot bode well the future of the 21-65 yr olds now and the children in 5-10 years. This is a sociological nightmare in the making.

  24. Transor Z says:

    @bokolis: Like your posts. Anybody who skipped class to hang out at the track is all right by me. In fact, it’s pretty much a prerequisite to being all right by me. ;-)

    Your point about the average wage slave being hemmed in to the tune of 90% of income to meet basic expenses really pissed me off because (a) it undermines my earlier point about disposable income, and (b) I can’t think of any good argument against it. Except to say that maybe that 90% line for most people is a psychological line that represents paying for a barely middle class standard of living. And as soon as you start cutting into that 90% … it’s a big blow because of expectations.

  25. JasRas says:

    Ah this is why stats and percentages are so much fun! One person can say, “you’re looking at this incorrectly because even though the consumer is 70% of GDP, only 25% of the 70% is discretionary”…well, look at it another way. If discretionary went to 0%, we’d be at the consumer contracting to 52.5%, which would be 7.5% below what seems to be the “norm” for a really long time which J Grantham places at 62-63% of GDP… Of course nothing goes to 0%, so 52.5% is good only for non-discretionary. The thing Rosie refers to is substitution in the non-discretion category. People quit buying steak so often and switch to pork or hamburger. They don’t do Breyer’s ice cream, but buy the off brand stuff that is on sale. Maybe they don’t stop the cable, but they downsize to a less expensive package. The smart thermostat is adjusted a little tighter on the temperatures. Etc, etc.

    I had an optimist tell me that 10% unemployment wasn’t bad…90% were working!

    Harris and Bianco also have an interesting take on high consumer debt. They believe we will “grow” into a smaller percent number—or it will resolve itself via people opting for bankruptcy–which they say is all right because the banks are reserving for it anyhow! These guys can turn a turd into gold, I tell ya!

    I will confirm that the local steakhouse here in the heartland is packed and has been for the past few months, so it isn’t just a holiday party thing… Somewhere people have found a little extra money and are spending it…

    I would say it pays not to be too optimistic or pessimistic…just be aware (a la George Castanza “I am aware!!!”)

  26. Bokolis says:

    @ Transor Z: Since we said much the same things, you could say that it undermines my own points. If it makes you feel any better, I probably thought that up at the track.

    Actually, that’s why I was careful to use “hemmed into” and didn’t use the word “basic.” The implication is that any tinkering digging into that 90% would require a fundamental (impractical) lifestyle change…kind of like trying to fit into a dress that’s too tight.

  27. DeDude says:

    The remark about 90% of income “to meet basic expenses” needs to be adjusted its to meet PERCIEVED basic expenses. People are actually living and surviving on 12K/year. Most people could cut the Sq.ft. of their homes in half and drive cars that cost half as much as new. They could also drop their total food expenses by 30% and drop all this idiotic expensive electronics that fills their mansions. However, most of them have to be forced to live like that to realize that they can do it and be just fine. The danger of the current consumer credit crunch is that enough people get forced into this realization to make it mainstream to ask yourself “why the heck am I chasing all that sh*t”. Then the world would have to find another nation of idiots that will chase fluf and drive the economy up, so millionaires can continue to make millions.

  28. JasRas says:


    It is Perceived if you haven’t entered into the trap, however there are a lot of households that exactly in that trap. And while you can cut back the food to mac n cheese, etc. Much of the other choices have been made and simply don’t go away unless you settle the debt or go through bankruptcy. For all the stigma attached to the bankruptcy word, it is a relatively private pain (unlike divorce), and could help a household avoid years of working simply to pay off debts on things worth far less. I find it interesting that for individuals it holds such a stigma, and yet in the business world companies enter into re-org, exit and seem to rarely suffer long term affects of such actions. When was the last time you avoid flying an airline because they went bankrupt? How many people withheld their purchase of and auto in the “cash for clunkers” stimulus b/c the companies GM and Chrysler had just been through re-org? Anyhow, I digress.

    My point was perceived is only that way if you haven’t gotten stuck in the roach motel called a McMansion and bought the McCrap that goes with it…