The Herald Bulletin

Morning Update

Local Business

June 20, 2014

'Big Joe' Clark: Has discretionary spending grown?

Economics are interesting measurements. In my opinion, sometimes economists try to compare apples to apples and other times apples to oranges. My question is, what happens when the math is right but the context of the measurement has changed? Not necessarily an entirely new fruit per se but changed enough to move the equations relevance.

Discretionary income is the amount of money that a person has at the end of each month not already obligated by normal expenses. In other words, the expenditures are by choice and technically for non-essential items. This is true in the federal budget and true in each of our households.

Naturally when younger families are formed, the amount of their discretionary income tends to be less than in future years. Oddly enough, individuals under 25 years of age tend to have the highest amount of discretionary income because many still live with their parents and have few essential obligations, according to research conducted by Career Builder.

One challenge that financial analysts and economists are wrestling with is that the amount of discretionary income for the average American has not changed over the last 20 years. In other words, we are continuing to work, retirement accounts are growing and yet economic statistics say we have shown no real growth. These are the things that make me scratch my head and ponder. Are we missing something in the translation? I think the answer is yes.

We have discussed before that the economy is made up of various moving parts. Our gross domestic product (GDP), which is a way economists measure the growth of a country’s economy, is created by consumers, government and businesses. There are many moving parts, and the ability to measure and track it is astounding to me.

When we look at the stock market, however, many believe that what matters the most is the change in earnings relative to a company's past growth. Not where it has been or where it is currently, but rather the rate of change between the measurements. We call this trajectory and it can be positive, which is typically great for the stock if things are improving. The trajectory can be flat or negative, which is often problematic for the stock price regardless of the profitability or stability of the underlying company.

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