Over the last few months there has been great drama on Wall Street and on Main Street. From mid-July through mid-August gloom defined the mood on both avenues. Since late August the trajectories have diverged. Financial asset prices have staged an impressive recovery, not housing. National economic data has come in two forms. Some of the news is bad, some is worse. Wall Street, if measured by the S&P 500 Index, has recovered and consensus "wisdom" offers high hopes for the future. Main Street sentiment is decidedly down and concern is rising that the future holds pain and turmoil. Wall Street seems sure all the bad news, losses and fear are already over. It is uncommon for such dramatically divergent understandings of the economy to persist for long periods. This divergence is clear regarding the September jobs number. At 8:30 AM all eyes were on the markets as the Bureau of Labor Statistics reported September Preliminary Non-Farm Payrolls. The public hoped for strong job growth and low unemployment. Concentrated on future interest rate cuts, the markets were hoping for a number near or below the consensus estimate of 115,000 new non-farm payroll jobs.
The number came in right about on target, 110,000 new nonfarm pay-rolls. There were large upward revisions of the preliminary reports on July and August. This should serve as a caution about the accuracy of all such numbers. The August revision was from a preliminary estimate that riled markets and politicians, of -4000 to a revised +89,000 jobs. Now that is what one might call a major revision! The July number now stands at 93,000 new non-farm payroll jobs created. It is worth remembering that we need to create about 140,000-160,000 jobs to accommodate our population growth. Across the first 5 months of the year the average monthly job creation was 147,000 per month. This is not a great performance but, it is much better than our new 4 month average of 90,000 new jobs per month. We have experienced a 39% drop in the pace of job creation. A rather high 34% of all September jobs created were government jobs. That is down from the 64% of new jobs created by government in August. Less dramatic declines in employment are good news for many. However, the trend in employment data remains nothing to be excited about. The gains made in speculative markets over the last month and half were spurred by Federal Reserve rate cuts. The cuts were justified in reference to the overall economy. These numbers suggest that the Fed acted to soon and too much. Perhaps their attention is focused on markets far more than they like to admit? Perhaps they too are one side of the divide in perception of the economy? The divide is the real focus of this week's blog.
Financial markets, on average, have recovered their losses from the July/August turmoil. From July 18, 2007 through October 2, 2007, the S&P 500 lost about 140 points and then gained back 140 points. Thus, the broadest index of the leading 500 corporations' stock performance rallied all the way back into record territory between August 15, 2007 and October 03, 2007. Hopes are high for decent annual returns, bonuses and performance. Manhattan real estate has even bucked the national trend. Rental costs and housing prices remain outrageously high and in full-bubble stage here in NYC. The shares of large transnational companies have led the stock market recovery as investors look to these firm's huge offshore activities as a source of strength and growth.
The Federal Reserve's rapid, massive and repeated rate cuts comforted asset markets and buoyed spirits. Analysts, pundits and wealth allocation fell into line. After some panic selling, the "rational" and forward-looking indulged in panic buying. You are supposed to be comforted that the two panics have largely offset each other. Soothed fears and rising hopes quickly became stock buying. Money poured into firms that are not too dependent on the US. Here Wall Street and Main Street agree. It does not look so great for America. Housing and middle income America look like they are in for a prolonged period of stress. What Wall Street has been betting is that leading US transnational firms have successfully de-linked their wagons from the US economy. This allows the possibility that these firms and their investors can prosper despite trouble on the home front. While this is very possible, buying US assets to bet on the declining position of the US is a strange strategy.
The situation for the US macro-economy remains strikingly poor. For about a year, most major indicators of national economic health have been trending down. Statistics suggest that there remains economic growth but, rates of growth are slowing quickly. GDP growth rates have slipped, industrial production growth rates, retail sales growth, real hourly wage rates and capacity utilization are trending down [pdf]. Housing has turned on legions of Americans. The home is no longer a source of rising wealth, cheap credit and swelling pride. Housing is a source of anxiety. Real estate costs are a rising drag on sentiment and income. Surveys of consumer sentiment reveal rising unease. We are seeing an intensification of a definitive trend. Inequalities of wealth, income and opportunity have been diverging for several decades. This accelerated after 2001. Thus, much of the difference in understanding is driven by different positions in the economy. Main Street has good reasons to be scared and is in a far more difficult position than Wall Street.
Businesses and individuals with claims on foreign wealth, income and economic growth are advantaged. Housing, the asset middle class America bet on, is very local. Home prices are sensitive to local economic conditions and costs. Those whose incomes and fortunes are tied to international corporate activity and finance may have good reason to be less afraid. Recent declines in the US dollar and increases in the prices of basic commodities are also part of the story. As dollars fall, foreign earnings and assets appreciate. US-produced exports gain an advantage. Our exports become cheaper as our currency falls in value. Imported goods become more expensive as it takes a greater number of our declining dollars to buy them from foreign producers. All around the world, goods that are sold for dollars go up in price. Producers around the world who sell for dollars must get more dollars as each dollar declines in value. The fortunes of the US dollar could hit lower-income America hard. Falling dollars are related to rising food and energy costs. In recent reports, significant numbers of low income Americans are reporting budget problems from food and energy price increases. For many years, American consumers have been able to purchase very inexpensive basic wage goods produced around the world. The strength of the US dollar -- among other factors -- made this possible. Recent declines in the US dollar and expected future weakness call this into question. Thus, the declining dollar will hit hard America's middle classes. Rising import costs, expensive energy and food will combine with falling home prices and restricted access to credit. Meanwhile, the best positioned in foreign assets and export earnings will do far better. Their wealth will move easily into safe harbors, hard assets and foreign growth.
It is likely that the massive divergence in opinion about the near term economic future will decline -- possibly soon. This will occur as undue optimism about future asset price performance and excessive fear by some members of the middle class subside. Euphoria over the Fed rates will fade fast, unless further cuts occur. Further cuts will mean falling dollars and rising food and energy prices. More importantly, much divergence of opinion reflects divergence of reality and fortune within our population. This is more enduring, important and profound than temporary dislocations in the business cycle and asset prices. The longer term reality is that "we" are not of the same mind about the economy because "we" are not in similar positions of risk and reward. As we teeter on the edge of recession, it has become hard to find the policies that are good for "us." We are faced with very divergent opinions because we are not in the same boat.