Political Calculations
Unexpectedly Intriguing!
August 21, 2018

We've drilled down a bit deeper into the U.S. Census Bureau's data documenting the lifetime income trajectories that Americans have expect based on their level of education.

Previously, we looked just at those trajectories for all Americans with some work experience for the years from 2000 through 2016, which includes the data for Americans who work part time, who may only work part of a year, who may have exited the workforce, whether temporarily, such as to focus on raising children or because of layoffs or other job changes, or permanently, such as through retirement.

Now, we're focusing like a laser beam on Americans who work full-time, year-round and, as a bonus, we've expanded the data in our analysis to include all the years for which the Census Bureau has provided this information in a convenient digital format, which is to say since 1994. Our first chart shows the mean lifetime income trajectories for various levels of educational attainment for these full-time, year-round workers:

Mean Lifetime Income Trajectories by Education Level for Full-Time, Year-Round Workers as a Percentage of the Age 18-24 Cohort's Mean Income, 1994-2016

This chart reveals a clear difference in the education level-based lifetime income trajectories that Americans who work full-time, all year-round, where those who can sustain working at this pace can expect to have, on average, higher lifetime incomes with higher levels of educational attainment.

That income differentiation also carries from the very outset of their adult working lives, where incomes rise with higher levels of education. The following chart shows this data for 2016, which until September 2018 when the data for 2017 will be made public, represents the most recent year for which this data is available.

Mean Income for Age 18-24 Cohort Working Full-Time, Year-Round by Education Level, 2016

The pattern shown in the first chart is persistent from year-to-year in the Census Bureau's historical data, which provides confidence that the survey data is capturing the average lifetime income trajectories of Americans who work full-time, year-round. As an example of this persistence, the following chart shows the age-based incomes as a percentage of the mean income of the Age 18-24 cohort for Bachelor degree holders who work full-time, year-round.

Lifetime Income Trajectories for Bachelor Degree Holders Working Full-Time, Year-Round, as Percent of Mean Income of Age 18-24 Cohort, 1994-2016

While there is considerable variation from year to year, the overall pattern for lifetime income trajectories holds across the various levels of educational attainment and over what is now more than two decades worth of income data.

References

U.S. Census Bureau. Current Population Survey Tables for Personal Income. PINC-04. Educational Attainment--People 18 Years Old and Over, by Total Money Earnings, Work Experience, Age, Race, Hispanic Origin, and Sex. Both Sexes, All Races. Worked Full Time, Year Round. [Digital files: 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016]. Accessed 19 August 2018.

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August 20, 2018

The doldrums of summer are here, which perhaps explains why investor reaction to geopolitical news would seem to be the only thing really moving the needle for the S&P 500 in the third week of August 2018.

After last week's concerns over the risk of contagion from Turkey's economic dilemmas began to be offset by a double dose of good news in the form of improved prospects for U.S.-China and U.S.-Mexico trade negotiations. But what really seems to have moved the needle during Week 3 of August 2018 was the solid earnings results that came out from both Walmart (NYSE: WMT) and Cisco (NASDAQ: CSCO) on Thursday, 16 August 2018.

Alternative Futures - S&P 500 - 2018Q3 - Standard Model with Redzone Forecast for 2019Q1 Focus between 20180808 and 20180911 - Snapshot on 17 Aug 2018

That said, this being the doldrums of summer, there wasn't a whole lot of major market-moving news in the week that was.

Monday, 13 August 2018
Tuesday, 14 August 2018
Wednesday, 15 August 2018
Thursday, 16 August 2018
Friday, 17 August 2018

For the second week in a row, Barry Ritholtz identified more negatives than positives in the week's economics and markets news.

The good news is that the S&P 500 is continuing to track along with our redzone forecast, where in a week where there really wasn't much going on, stock prices behaved as expected.

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August 17, 2018

There are certain things that are understood without having to be said, because they're very obvious. Things like "never get involved in a land war in Asia" or "never go against a Sicilian when death is on the line" are examples of these kinds of things. Other examples can be found in the kinds of things that Captain Obvious might say, such as "the sky is blue" or "Philadelphians sure drink a lot of alcohol".

But what drives Philadelphians to drink so much alcohol?

The short answer is that outside of prohibition, Philadelphians have always consumed large quantities of alcohol. And as many Philadelphians might point out, prohibition wasn't much of an obstacle for the city's dedicated alcohol consumers.

When it comes to alcohol consumption then, the city of Philadelphia is starting out with a strong base. So what might prompt already heavy-drinking Philadelphians to boost their alcohol consumption to even higher levels?

Believe it or not, the city's controversial tax on soft drinks would appear to be behind the city's recent surge in alcohol sales. Last August, Scott Drenkard and Courtney Shupert of the nonpartisan Tax Foundation found that Philadelphia's "high tax rate on nonalcoholic beverages makes them more expensive than beer in some cases", which they believed was "likely to drive consumers to more alcoholic beverage consumption".

Philadelphia's monthly liquor tax collections confirm that this outcome has come to pass, where the revenues from the city's 10% tax on alcoholic beverage sales is documented within its tax reports for School District revenue collections. The following chart, which covers the City of Philadelphia's last five fiscal years, reveals that in the 18 months since the implementation of the city's controversial tax on all naturally and artificially-sweetened beverages distributed for retail sale within the city went into effect, the city's has been collecting an average of $6.5 million per month from its alcohol taxes, up from the average of $5.5 million per month it collected in the 18 months preceding the soda tax implementation, an increase of $1 million per month on average.

Philadelphia Liquor Tax Collections by Month, July 2013 to June 2018

The same phenomenon is not evident on the opposite side of Pennsylvania, where Allegheny County's revenues from its 7% tax on alcoholic beverage sales indicate no meaningful difference in the level of alcohol sales in that region of the same state over the same period of time (the data for June 2018 is preliminary).

Philadelphia Liquor Tax Collections by Month, July 2013 to June 2018

The two observations together are important because Allegheny County, being in the same state as Philadelphia and thereby subject to all of the same state laws and regulations on the sale of alcohol, represents the control in what amounts to a natural experiment for measuring the effect of Philadelphia's soda tax upon liquor sales.

And what a difference it appears to be. Doing the math to work out the corresponding level of liquor sales, Philadelphia's residents would appear to have increased their average monthly consumption of alcoholic beverages from an average of $55 million to $65 million, an increase of $10 million in the sales of taxed alcoholic beverages per month.

Tax Foundation (Ben Rickards): 4 Janauary 2017 Sale Price of 12-Pack of 12-Oz Bottles of Icehouse Beer

Let's put that figure into a more fun context! In January 2017, just after Philadelphia's soda tax went into effect, the Tax Foundation documented that the sale price of a 12-pack of Icehouse beer, which had just become cheaper than a 12-pack of non-alcoholic Propel sports drinks, was $7.99 in Philadelphia. For the sake of argument, let's say that after Philadelphia's soda tax went into effect, Philadelphia's residents began exclusively consuming $10 million worth of Icehouse beer per month at this price. How many extra bottles of beer per month is that?

Dividing the average increase of $10 million per month by $7.99 for the 12-pack of Icehouse beer, we find that corresponds to the equivalent of roughly 1.25 million 12-packs per month, which works out to be about 15 million extra 12-oz bottles of beer consumed in the city. Per month.

Philadelphia's total population in July 2017 was estimated to be 1.581 million people. So, after the City of Philadelphia imposed its sweetened beverage tax in January 2017, every man, woman and child living in the city responded by increasing their consumption of Icehouse beer by 9.5 bottles per month. Multiplied by 12 months, that's an increase of 114 bottles per year.

Of course, that's a ridiculous number, because Pennsylvania prohibits the sale of alcoholic beverages to individuals under the age of 21. That prohibition blocks some 26% of the city's population from even being able to buy Icehouse beer, assuming that the law is actively enforced against Philadelphia residents under that age. If we do the back-of-the-envelope math to estimate how many extra equivalent 12-fluid-ounce bottles of Icehouse beer that Philadelphia's adult population is consuming, we come up with a monthly increase of 12.9 bottles per legal drinking-age Philadelphian, or over 154 bottles of Icehouse beer per adult in the city per year.

Icehouse Beer - Source: Utah Alcohol Control Board - https://abc.utah.gov/about/documents/81st_annual.pdf

If we convert 12-fluid-ounce bottles of Icehouse beer into the equivalent number of calories, we find that at 149 calories per 12-fluid ounce container, Philadelphia's adults are drinking in an additional 1,916 calories per month, or just over 22,989 calories per year.

Since a 12-ounce bottle of Coca-Cola has 140 calories, that's a nearly one-for-one swap where calories are concerned, so there's no realized health benefit from calorie reduction for the portion of Philadelphia's adult population who have changed out sugary soft drinks for beer. For consumers who switched from low-to-no calorie soft drinks to beer, their calorie consumption would have substantially increased.

That of course doesn't consider the impact of other potential health and safety issues that city health officials believe would go along with the increased alcohol consumption in Philadelphia that would appear to have come about as a direct consequence of the city's controversial soda tax.

No matter what, one solid fact holds true. Philadelphians sure drink a lot of alcohol, and since the city's soda tax went into effect, they are sure drinking a lot more!

Update 8:34 PM EDT: Here's a chart showing the overall trend for the trailing 12-month total for Philadelphia's liquor tax collections from July 2014 through June 2018.

Trailing 12 Month Philadelphia Liquor Tax Collections, July 2014 to June 2018

You can see Philadelphia's liquor tax collections accelerate from their previous growth rate beginning in January 2017 through December 2017. The peak values in the chart occur in January and February 2018 which, if you think about what was going on in Philadelphia in those specific months, have their own special contributing factor to boosting alcohol consumption in the city! Since then, Philadelphia's liquor tax collections have largely leveled out at an elevated level with respect to the trend that existed before Philadelphia's soda tax went into effect.

In the 18 months from January 2017 through June 2018, the trailing year total of Philadelphia's liquor tax collections increased by 13.4% of its December 2016 value, thanks to Philadelphia's increase in alcohol consumption. By comparison, the trailing year total of U.S. federal alcohol tax collections rose by just 0.5% over the same period. Since the city implemented its controversial soda tax, Philadelphians have increased their alcohol consumption by a much larger amount than the rest of America!

Previously on Political Calculations

We've been covering the story of Philadelphia's flawed soda tax on roughly a monthly basis from almost the very beginning, where our coverage began as something of a natural extension from one of the stories we featured as part of our Examples of Junk Science Series. The linked list below will take you through all our in-near-real-time analysis of the impact of the tax, which at this writing, has still to reach its end.

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August 16, 2018

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 at approximately the midpoint of the current quarter, shortly after most U.S. firms have announced their previous quarter's earnings.

This time round, we find that the projected future for S&P 500 earnings has softened through the end of 2018, but has strengthened through the end of 2019.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2020, Snapshot on 10 August 2018

Compared to the previous quarter, a mixed picture.

Perhaps the biggest contributor to that downward adjustment in the near term expected future for earnings was Facebook (Nasdaq: FB), which TheStreet described as a "complete outlier" after they reported their earnings and outlook at the end of July 2018.

Earnings blowouts from Caterpillar (CAT - Get Report) and Amazon (AMZN - Get Report) look like the norm this earnings season, not the Facebook (FB - Get Report) earnings call meltdown.

"The tone on earnings calls remains positive - mentions of "better" or "stronger" relative to "worse" or weaker" is still above-average (despite being down from the last few quarters' highs), and mentions of optimism are also above average (and up from last quarter)," says Bank of America Merrill Lynch strategists.

Facebook's "Black Thursday" was in large part fueled by an earnings call littered with concerns about future growth rates.

We'll see how things change three months from now, with the fourth quarter of each year being historically the most popular period for when companies announce any significant changes in their future business outlook.

Data Source

Silverblatt, Howard. Standard & Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. 14 August 2018.

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August 15, 2018

How will your annual income change over your life?

That's a difficult, if not impossible, question to answer for an individual, considering that it depends upon specific details like your education, your experience, whether you work, how often you might change jobs, experience a layoff, get promoted, when you retire, et cetera. Statistically however, we can get a pretty good idea from income data collected by the U.S. Census Bureau.

We recently completed a project where we looked at income data for the total population for every year from 2000 through 2016, where we found a pretty unique pattern hidden within each year's data - the average income for the reported age groups follows a fairly predictable and stable trajectory from year to year.

In the following chart, we've graphed four curves, where each curve corresponds to a different level of educational attainment. To generate each trajectory, for each level of education in each year, we first converted the average incomes listed for each age group into a percentage of the average income reported for the Age 18-24 cohort. We then calculated the average percentage income for each age group over all the years from 2000 through 2016.

Lifetime Average Income Trajectories as Percent of Average Mean Income for Age 18-24 Cohort, by Educational Attainment, Based on Income Data from 2000 through 2016

For each data point, the "Reference Age" in the horizontal axis represents the middle of the age cohort for which the income data was reported, which for Age 18-24 is 21, for Age 25-29 is 27, and so on....

Right away, you can see the similarities between the income trajectories by age, which all fall within a relatively narrow range of one another. And that's despite the great differences between the average incomes reported for each education level for the Age 18-24 cohort, which we've indicated for 2016 in the inset in the chart above.

What kind of difference does that base average income set by education level have on a the average American's lifetime income trajectory and earnings?

In the next chart, we do the math, pairing the 2016 average income of the Age 18-24 group with the average income trajectories for all years from 2000 through 2016.

Lifetime Average Income Trajectories by Educational Attainment, Based on Income Data from 2000 through 2016, with 2016 Age 18-24 Base Incomes

The curves for each education level don't match the actual income trajectories of each for 2016, but they're not all that far off either.

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