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.
How do you get Wall Street to be less destructive? How do you get Main Street to care enough about what is happening to demand change? All you hear in the media and from politicians is that the US economy is "strong", growing and creating jobs and wealth. Is this the big lie that is most willingly believed?
In 1929 Hoover was raving about the economy .
Peak Oil seems to be just around the corner . Once demand overcomes supply todays troubles will be missed .
How many million could a business have in the bank and be paying $100's per share as didvidens if they were not always scared of a take over.
Business pass out all they can in Stock Options because building a large bank account would make them a traget for a take over.
So the investor looses over and over. Many get stock options for just being employed there while they do the same job over and over as the product sales remains the same month after month and years after year.
It costs an extra $10,000 to lose your job. You now have to pay for all of your family's insurance. Before, it was some part taken care of by your employer in deference to your stagnating wages/salary.
If you haven't lost your job, you are still paying more for the other family members.
You are paying twice as much to heat your house and drive to work than you did 5 years ago.
If you have 2 cars, that's easily $50/wk extra. And going on national averages, you are paying an extra $250/mo to keep your feet warm.
The better part of another mortgage/mo.
Here's the dirty little secret. You will only pick up on it by personal observation and talking with people.
Yes, we ran up discretionary debt, but a year ago that changed. We have been using debt because we have to.
Go to your local convenience store on a Wed. or Thurs. More people are using their credit cards for their $2.00 coffee and donut. That's because direct deposit is usually done on Thurs night. These people have no cash.
Last year they paid a month or two for heating on their credit card. But personal credit debt is not quite horrifically bad.
That is because they are good little spenders. They MOVED IT ONTO THEIR HOME EQUITY LINE. Everybody knows you pay less interest that way, and get the tax deduction on interest.
That's fine until you do it for too long and debt service becomes more than a minor inconvenience.
To the upper climes of our economy, these regressive punishments go unmarked. But to the ever punished middle class, it is creating a blackhole. Once you begin to fall....
there is nothing to catch you and you have become the "new poor".
We don't have two different perspectives of the economy, we have two different realities which are already here.
Personally, I have been cautious in the market since losing a lot during the bubble era. I have been partly in money funds when they didn't even pay enough to cover the rate of inflation, because I was leery of bonds and stocks.
Oh mannn, I hope we aren't playing the greater fool theory enacted with our life savings. If so, I am the falling star in my own little area of market:-)
What is amazing to me is how things can be so terrible one day in the market, then the next day everything is hot to trot.
The devalued dollar makes our Chinese bargains expensive, I suppose.
Does this mean our jobs will come back? Will Ford, Diamer Chrysler and GM hire Americans again to build the cars?
Thank you for taking the time to read and comment. I always like reading the comments and try to include questions and concerns in future work.
I thought I might make a few points of clarity.
Falling dollars mean our final products get cheaper and our imports get more expensive when they are exports to or imports from the countries with appreciating currencies. When the dollar falls it does not fall and does not fall equally against all other currencies. In addition, all the imported inputs to production done in America rise in price and that can effect export's price as well. The results are complex and take time to understand.
On The Fed and Employment
The Fed either cut and was wise because the economy was really in trouble and therefore, still is a few weeks later. Or, they cut and did not need to but paniced over housing, bank needs and markets. Either way, we spent today watching markets seemlessly and excitedly switch off from Fed rate cut bull stories to economic strength bull stories. What do both sets of stories have in common? They are both bull.
Thanks again for reading and commenting.
Max
it has sometimes been said that a falling currency makes exports cheaper. But, if there are no more manufacturing jobs, what is left to export besides raw materials? And, how does it help us if our raw materials are cheaper? If we get less for our ores, woods, and food crops, doesn't that mean we have less to spend on the manufactured goods made in the factories where they have none of the protections that factories here used to have?
I'm already making plans to go abroad because with a worthless dollar life here just won't be the same. Dark times are coming in the not so distant future.
Mainly, its been the latter, and that has been bad. Why can't we know what TYPE of jobs are being increase? Good paying, living-wage jobs increasing would be good news, increasing minimum wage jobs are not.
And how many of these jobs are people taking 2 jobs (or more!) trying to make ends meet?
I find Wall Street economic data bizzarely out of touch with the reality me and my wallet live and much of it because they fail to qualify and explain their data.
The fact is that we are in a highly competitive world in which the educated and skilled do, on average, pretty well. They and the companies in which they are involved are seeing success here and abroad. If this country was able to educate all of our citizens to compete in the world, our economy would be unstoppable. We can't do that with our current system -- or the current popular views towards education.
Rather than complain about this set of circumstances, why don't we work on making our people better prepared for the future? Hope isn't a strategy -- and neither is denial.
There are people who owe $140,000 student loans that are ending up with $20,000 jobs.
The corporations and the Bushites are in charge, why aren't they seeing to it that they are taught the skills they need.
They are taught to type, read, add, multiply, add and subtract. Many are taught advanced subjects. It shouldn't take much more to train them with the exact skills.
It sounds like an excuse to blame outsoucing on our schools.
Up through the 60s, the Dow Jones was a fairly decent measure of US performance. It was made up of giants like GM, Ford, IBM etc, employing a major share of the US workforce, producing goods in America to be sold to Americans.
With downsizing, outsourcing and globalization, the positive performance of a corporation does not necessarily reflect on the performance of America as a whole.
In order to preempt the smug trolls, I'll say - fuck those not smart enough to invest in the companies making profits overseas. Isn't that essentially their attitude?
The pressure on banks is eased; as for troubled mortgagees, 'so what?' And while the MSM is still emphasising the 'sub-prime problem' there are even worse outcomes rearing up" munipical bonds! (who knew?!) and small businesses with good credit and business models, but no access to restricted credit now. And questions about pensions funds tied to the damnable 'innovative investment vehicles'.
Not to put too fine a point on it, it's a Ponzi scheme with few new mugs wanting to buy in.
And I hope Big Al's "Age of Flatulence" ends up in the remainder bins Very Soon.
The only way to prevent future merchants of death from profiting
is to insure criminal penalties i.e. jail time. The possibility of real accountability might alter the attitude that money making is the highest goal, regardless of human consequences.
In fact, all corporate crime might stop if every CEO had to face the consequences of willful mismanagement.
The rise in the stock market is not good for the US. It is only seems good to those who think that the money made there will protect them from the violence that pirates use. LOL.
Stagflation for the masses .
Not to worry though ... Peak Oil will bring it all down ... even for the elites and the corporatocracy .
They called it stagflation then ...
Couragerous leaders are conspiciously absent and the Middle Class is submerged with no leader or movement to represent its interests. And no intellectual or grass roots effort on the horizon.
A democracy without its middle class is like a living organism without its heart.
This condition did not have to be. It was and is not ineveitable. Able, committed citizens must come together to demand of our leadership to turn our Country towards a policy of renewed growth and development. It is still not too late.
We need to get together and get some work done.
John Bogle's recent book addresses the difference between the productive economy and the financial economy, noting that one builds wealth while the other (though useful) does not.
http://www.vanguard.com/bogle_site/sp20060208.htm