Like the annual migratory patterns of snowbirds, each year brings the “hope” of a surge in economic activity. According to the most recent National Association Of Business Economics(NABE) survey:
“Real GDP grew 1.7% in 2012. Panelists anticipate real GDP growth to accelerate steadily from a 1.8% annual rate in the fourth quarter of 2013 to 3% in the fourth quarter of 2014. The medians of the five lowest and five highest individual forecasts for 2014 are 1.9% and 4.0%, respectively.”
Unfortunately, each year has been a disappointment to economic forecasts with current annual real economic growth averaging only 1.2% since 2009. With the first quarter of 2014 already in the negative column, it will take quite a surge in economic activity in the remaining three quarters to meet expectations.
However, there is no arguing that there has indeed been economic recovery in the U.S. My good friend and colleague Doug Short tracks the “Big Four” economic indicators each month(his site is a daily must-read) as shown in the chart below:
There are two important points to take away from his analysis. First, the primary economic data that feeds into the economic calculation have been expanding. Secondly, the current economic expansion is now 59 months in length which makes it the 5th longest recovery in U.S. history. While the current economic cycle could certainly last longer, (post WWII expansions have averaged 63 months) the economic and business cycles have not been repealed. Notice the “flattening” of economic growth in the chart above.
However, as I look at a variety of economic data, a question emerges. Since economic recoveries should be a function of economic prosperity across the national spectrum, is the current economic recovery achieving that goal? In other words, while Wall Street and the top 20% of the population in terms of wealth have certainly enjoyed the surge in asset prices due to Federal Reserve interventions, has the other 80% of the population likewise seen an increase in prosperity?
In order for someone to be “better off” they need a job and wage growth that exceeds the rate of inflation, taxes, and cost of living. As I discussed this past Monday, since the beginning of 2009 there has been little increase in the number of full-time jobs relative to the working age population in the country.
Furthermore, real disposable personal income growth has continued to wane even as the official unemployment rate declines.
The problem that this presents for hopes of a stronger economic recovery is that nearly 70% of economic growth is driven by personal consumption. With households still heavily leveraged It should be no surprise that economic growth has primarily “muddled through” in recent years.
The real story lies hidden below the headlines. Despite signs of economic recovery on the surface, the underbelly of the economy remains vastly weak. As I stated above, an organic economic recovery should be one that provides a lift in prosperity across a wide swath of the population. However, the current economic recovery has not done that.
The rise of the “welfare state” over the past six years has been unprecedented. Social benefits as a percentage of real disposable income is at record levels as wages remain pressured due to a large and available labor competing for limited job openings. While incomes did uptick in the most recent quarter, it was not due to a significant rise in actual wages but rather increased social benefits.
There is an old adage that warns to“never count the consumer out.” Consumers are creative in finding alternative sources of income in order to sustain their current standard of living but does not bode well for long term economic prosperity.
Student loans from the government have more than quadrupled as unemployment insurance has run out. Once private student loans are included the total amount of student loan debt has surged to more than $1 Trillion.I stated in August of 2012 that:
“The problem with the current levels of student loan debt which has likely been used for consumption rather than education is that eventually a large chunk of these loans will default. However, the difference now, as opposed to the ‘sub-prime’ housing loan debacle, it that there is no asset sitting behind the loan – just a promise to repay. If you thought sub-prime loans turned out badly – just wait.”
At that time, the statement was readily dismissed. It was clearly evident that everyone was simply going back to school to gain further education. However, this past March the WSJ made a shocking revelation:
“Some Americans caught in the weak job market are lining up for federal student aid, not for education that boosts their employment prospects but for the chance to take out low-cost loans, sometimes with little intention of getting a degree.”
Either the workplace has become extremely unsafe and reminiscent of Sinclair’s classic novel“The Jungle,” or there are a lot of people lying about being disabled.
While almost 2.6 million net new jobs have added since the beginnig of 2009, there have been more than 16.3 million individuals that are now getting support from food stamps and/or disability. Of course, with effectively 1 out of 3 individuals no longer counted as part of the work force this should not be surprising.
As I stated earlier, I am NOT disputing the “quantity” of economic recovery that has occurred over recent years. What I am questioning is the “quality” of the recovery.
It is clear that for the majority of Americans there has been little increase in economic prosperity. This is why recent polls find the approval rating for the current Administration near their lows. Furthermore, while claims of economic recovery abound in the financial press, the attitudes of small business owners surveyed nationwide remain at levels normally associated with recessions.
Bill Dunkelberg, NFIB Chief Economist, summed this up well when he stated recently:
“Small business confidence rising is always a good thing, but it’s tough to be excited by meager growth in an otherwise tepid economy. Washington remains in a state of policy paralysis. From the small business perspective there continues to be no progress on their top problems: cost of health insurance, uncertainty about economic conditions, energy costs, uncertainty about government actions, unreasonable regulation and red tape, and the tax code.”
The statistical data clearly shows that this has been the case. However, the 100 million Americans that currently depend on some sort of social assistance to “make ends meet” are likely to disagree with that view.
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