Apple to the Rescue

 | Apr 24, 2013 | 4:30 PM EDT  | Comments
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Apple's (AAPL) earnings came out Tuesday. Some of you may have liked the results, others not so much. But what I liked was the company's declaration of a dividend increase. This comes after dozens of companies that have either increased dividends this year or are announcing increases.

This is unequivocally a good thing.

As all economists know, someone has to spend money for the economy to work. If we all sit on our money, there is no economy. It also goes without saying that someone's spending is another person's income and savings. In the U.S. economy, households do most of the spending. About 70% of GDP is comprised of personal consumption. That's all the stuff that you, me and everyone else spends money on.

The government is the second-biggest spender, making up about 20% of GDP. Next is business with about 13%. If you've been keeping track, you probably noticed that this adds up to 103%, but don't worry, there's nothing wrong with my math. The fourth and final component of GDP, net exports (exports minus imports), subtracts that 3% because the U.S. runs a trade deficit.

This chart shows the breakdown:

As you can see, government spending kicked in during the financial crisis and the economic downturn. It went from about 19% of GDP to 22% of GDP. But in the past two years, budget cuts and other spending reductions have taken government's share of GDP down. That means the government's contribution to GDP has been falling and this helps to explain much of the weak output numbers in recent quarters.

On the other hand, personal consumption expenditures, the largest component of GDP, pretty much stayed at 70% throughout the past six years. There hasn't been much change. Whatever spending was lost by middle and low income households was generally gained by higher income earners, and government safety nets such as unemployment insurance, Social Security, veterans benefits and other transfer payments also helped to mitigate the hit to income for a lot of people. So the personal consumption contribution to GDP has been stable -- not adding, but not subtracting.

Business spending and investment, however, is a different story. As we can see, business spending collapsed between 2007 and 2009. Since then, it has been creeping back. That's important because the personal consumption and government spending and investment components are flat and falling, respectively. Something must make up the difference, and the improvement in the trade deficit is not large enough to offset the drag from government saving.

Enter the rising trend of higher dividends. Another way to view this is as business spending or business "un-saving." Ultimately, that flows to the other three sectors: households get that money, foreigners who own U.S. stocks get that money and, unfortunately, the government gets some via dividend taxes (that will also work to bring down the deficit).

Now that some of those retained earnings (corporate "savings") are finally being "spent," we will see an increase in personal income and, hopefully, it will lead to higher consumption and a stronger economy. In other words, rising GDP.

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