FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 7, 2014
Unemployment Dips Below 6%, But Incomes Stagnate
IN THIS ISSUE:
1. US Unemployment Rate Dips to 6-Year Low
2. Why President Obama Can’t Sell This Economy
3. More Than Jobs, Americans Need Rising Incomes
4. The Last Year Has Been a Tough One For Income
5. A Glimmer of Hope: Capital Spending is Rebounding
6. Potomac & YCG Webinar Recordings Available Now
Overview
Last Friday’s unemployment report came in better than expected. The headline unemployment rate fell more than anticipated, from 6.1% in August to 5.9% last month. The number of new jobs created last month was also better than expected at 248,000.
Given that the unemployment rate is now below 6%, and given that 2Q GDP expanded by 4.6%, you might think the economy is finally off to the races. But what is becoming increasingly clear is that wages for most Americans have been stagnant or falling since before the Great Recession began in late 2007.
As we will see below, this trend of stagnant income has actually been with us since the early 2000s. Without rising incomes, there’s little reason for people to feel like their financial lives are getting better or for the economy to grow at a faster rate.
Fortunately, not all the news is bad. While the vast majority of Americans believe that we’re either still in a recession or the country is headed in the wrong direction,pessimism in the business community is lifting. Companies are investing more in capital assets. After years of sitting on their hands, companies are beginning once again to build their businesses.
Finally, recorded versions of our recent webinars with Potomac Fund Managementand YCG Investments are now available on our website at www.halbertwealth.com. Both managers explain in detail how their investment strategies work. I encourage you to watch these videos to see if their strategies are a fit for your portfolio.
US Unemployment Rate Dips to 6-Year Low
Last Friday’s unemployment report for September came in better than expected, and the jobs numbers for July and August were revised higher as well. The official unemployment rate fell more than expected to 5.9%, down from 6.1% in August, according to the government’s Bureau of Labor Statistics (BLS). That’s the lowest level in more than six years.
The US economy added 248,000 jobs in September, well above the pre-report consensus of 215,000, and well above the dismal 142,000 reported for August. The BLS also revised upward the previous estimates of jobs created in July and August by a total of 69,000. The economy has created an average of 213,000 new jobs per month over the past year.
As usual, not all of the news was good. The percentage of working-age Americans in the labor force dipped to 62.7% in September, from 62.8% in August, the lowest since February 1978. A lot of the Americans leaving the labor force are Baby Boomers retiring, but many are people who have simply given up hope of finding a good job and therefor are no longer counted as unemployed.
Many others have dropped out of the labor force, which shows up in the numbers as a 3.3 percentage point drop in the participation rate since 2007. That might not seem like a big number, but it represents apprx. 7 million people who would be working or looking for work if they hadn’t dropped out.
Combined with all the unemployed and underemployed, that’s a lot of people who are contributing less to the economy than they would have in a 2007 scenario. Some draw government subsidies funded by taxpayers and have no other income.
Also, average hourly earnings did not improve as expected, ticking down to $24.53 in September from $24.54 in August. Wages have been a persistent weak spot in the US economy – and a cause for pessimism among American workers – remaining stagnant even as unemployment has been in a steady decline.
Other measures of unemployment are improving but are still elevated. The U-5 unemployment rate, which includes those who want to work and looked for a job in the previous four weeks, fell from 7.4% to 7.3% in September.
The U-6 unemployment rate, which includes those working part-time but would prefer full-time jobs, fell from 12.0% to 11.8% in September. While these numbers are encouraging, both are still significantly higher than desired.
All in all, the September unemployment report was positive. You can bet that President Obama will be touting the 5.9% unemployment rate at each and every campaign stop from now until November 4.
Why President Obama Can’t Sell This Economy
The president is in full campaign mode ahead of the upcoming mid-term elections. He desperately wants the Democrats to retain majority control of the Senate and limit the seats lost to GOP candidates. So he’s out there campaigning for Democrats who are up for re-election and new candidates – at least those who will appear with him.
The president’s message is that the economy has recovered, and he has lots of flowery statistics to back him up. In his mind, he saved the US economy from catastrophe, and the economy’s finally coming back strongly now. In addition to the latest 5.9% unemployment rate, the economy grew by a stronger than expected 4.6% (annual rate) in the 2Q. And he has a litany of other economic stats that he quotes to bolster his case that the economy is stronger that it really is.
The problem is that most Americans simply do not buy it. Some polls still show that almost three-fourths (72%) of Americans believe the economy remains in a recession. The latest Associated Press poll found that 68% of respondents believe the country is headed in the wrong direction, versus only about one-third who believe we’re on the right track. Obama’s job approval rating remains mired at 43%, while 53% disapproveaccording to the latest RealClearPolitics average.
The grim reality is that most Americans don’t like the “new normal.” And that fact leads us directly to today’s main topic.
More Than Jobs, Americans Need Rising Incomes
Since the economic recovery began in 2009, average hourly wages have barely kept up with inflation – and not even that last year. Without rising incomes, there’s little reason for people to feel like their lives are getting better or for the economy to grow at a faster rate. The picture looks even worse when you focus on the middle class.
The Census Bureau released data last week showing that the median household income didn’t rise at all in 2013. In fact, by this measure, the typical family has beendoing worse since long before the recession. The chart below, from the Center for American Progress, shows just how long the average American family has been running in place or losing ground.
These trends were easy to ignore during the real-estate bubble years, when families could compensate for stagnant incomes with home equity loans. But today, all of this has become painfully obvious to Americans.
In fact, things are even worse than what is illustrated in the chart above. Wage gains, adjusted for inflation, have not gained much over the last 40 years for the middle class. According to the Census Bureau, the median full-time male worker earned an inflation-adjusted $49,678 in 1973 versus only $51,939 shown above for 2013.
And with inflation-adjusted incomes flat or falling, there’s little reason for people to feel like their lives are getting better or for the economy to grow at a faster rate.
The Last Year Has Been a Tough One For Income
The last year in particular has been a poor one for American workers’ wages. Comparing the first half of 2014 with the first half of 2013, real (inflation-adjusted) hourly wages fell for workers in nearly every category – even for those with a bachelor’s or advanced degree.
Of course, this is not a new story. Comparing the first half of 2014 with the first half of 2007 (the last period of reasonable labor market health before the Great Recession), hourly wages for the vast majority of American workers have been flat or falling.
And even since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline – even though decades of consistent gains in economy-wide productivity should have provided ample room for wage growth.
The poor performance of American workers’ wages in recent decades – particularly their failure to grow at anywhere near the pace of overall productivity – is the country’s central economic challenge. Indeed, it’s hard to think of a more important economic development in recent years. It is at the root of the large rise in overall income inequality that has attracted so much attention in the past several years.
A range of other economic challenges – reducing poverty, increasing mobility and spurring a more complete recovery from the Great Recession – also rely largely on boosting wage growth for the vast majority. Without an improvement in wage growth, the economy will continue to be sluggish.
A Glimmer of Hope: Capital Spending is Rebounding
While the vast majority of Americans believe that we’re either still in a recession or the country is headed in the wrong direction (or both), pessimism in the business community is lifting. Companies are investing more. And if they continue to plow more cash into productive investments, not only will it increase our future economic potential capacity, it would boost growth and hiring very soon.
After years of sitting on their hands, companies are beginning once again to build their businesses. Investment by businesses plunged 20% during the recession, then rebounded at a decent pace in 2010 and 2011, but then slowed again in 2012 and early 2013.
Lately, there’s been a noticeable pickup in capital spending. Business investments are up 6.8% in the past year, after inflation. New orders for core capital equipment are up at a 16% annual pace in the past six months.
The acceleration in capital expenditures (also known as “capex”) is real. The question now is: Can this capital investment trend be sustained or will it slow yet again?
Many economists think business investment has more room to grow, and that capital spending could exceed expectations in the next couple of years. If so, that will give a needed boost to growth in this area. “The fundamental case for capex is the strongest it has been in years,” wrote Aneta Markowska, North American economist for Societe Generale. Below are a few reasons she believes this.
Companies need to expand. Since the recession ended, capital assets have been wearing out almost as fast as companies have been replacing them. So there has been little growth since the Great Recession. That means there’s a lot of pent-up demand for state-of-the art capital assets.
Net business investment has risen from an 80-year low of 0.5% of gross domestic product in late 2009 to 2.5% in the most recent quarter, but that’s still well below the historic average of 3.5%. As business confidence continues to grow, hopefully, owners and managers will feel more comfortable in increasing capital expenditures.
The capacity-utilization rate for plants and factories, a measure of the amount of slack capital, is nearly back to normal at about 79%. For the past five years, companies have been able to meet growing demand by utilizing their unused capacity. They won’t be able to do that for much longer. They need to expand their capacity.
Financing is getting easier. For most of the past five years, large businesses have been able to finance their capital investments from their cash flow. Yet small businesses that typically rely on bank loans have struggled because banks weren’t willing to lend. As a result, most small businesses didn’t participate in the surge in capital spending in 2010-11.
However, banks are beginning to loosen up, and more loans are flowing to businesses, especially small businesses. Commercial and industrial loans are now growing at a 12%annual pace.
Large businesses also need to borrow to finance their capital investments, but they have ready access to the bond market at very attractive rates. Credit for large and small businesses isn’t as tight as it once was.
It’s cheaper to build than to buy. For many years following the recession, most companies that wanted to expand found it cheaper to buy an existing business rather than to build one of its own. The market value of many companies was less than the replacement cost of their assets.
But with the recent run-up in the stock market to new highs, it’s now often cheaper to build than to buy. So instead of engaging in merger-and-acquisition activity that mostly enriches investment bankers on Wall Street, many companies are now trying to grow“organically” in a way that expands the nation’s economic capacity to produce.
If this trend continues to expand, it will mean more jobs and a healthier economy. But as I have written often this year, most economists expect GDP growth of 3% or less for 2015 and 2016. While there are some bright spots such as capital spending and auto sales, these improvements are happening largely because businesses and auto buyers simply have no choice but to upgrade.
What we really need to get this economy going is significant tax reform and a new, pro-growth administration in Washington.
Potomac & YCG Webinars Now Available
The recorded versions of our recent webinars with Potomac Fund Management andYCG Investments are now available on our website. CLICK HERE to learn about Potomac’s three different strategies, all of which have the ability to move to cash should market conditions warrant it.
To learn about YCG’s strategy that seeks to invest in under-valued low volatility stocks,CLICK HERE. I encourage you to watch these videos to see if their strategies are a fit for your portfolio.
Very best regards,
Gary D. Halbert
SPECIAL ARTICLES
U.S. Added 248,000 Jobs in September
Why Obama Can’t Sell This Economy
Americans’ incomes still stagnant after recession
