GDP is not the economy for the vast majority of Americans. It is simply money flows. It ignores housing prices. It ignores net worth. It ignores health care. It ignores unemployment. It ignores the education of Joe’s kids. It ignores the play money Joe Sixpack has left over at the end of the month. GDP is a measure for those that believe higher money flows eventually improve the life of Joe Sixpack. It is safe to say the economic health of Joe Sixpack has been on a general downtrend since 2000 despite the overall GDP gains.
Every week I try to sit back and put the economy back into perspective. By analyzing each indicator as it is released, it essentially forces your attention from the forest to the trees. All indicators have a different weight in the scheme of things – some seemingly unimportant ones have a higher correlation to Joe Sixpack’s economy then the ones the analysts use to correlate to GDP. Once a week it is time to examine the forest.
Trapped by Debt
I keep Joe Sixpack in my mind when thinking through the economic perspectives. From my vantage point, Joe is screwed. There is no dynamic in play to grow jobs, the value of houses, or real net worth. Joe’s kids are faced with the negative dynamic of reduced funding for education – and there are few jobs waiting at the end of the tunnel for Joe’s kids. The American dream of using home ownership to build a retirement nest egg was destroyed while the boomers were just getting ready to exercise this option – bad luck? Luck surely is in play, but Joe’s situation is a product of his indebtedness, a government which encouraged credit, and a business community more than willing to make credit available.
The foundation of the American economic system is based on debt – buy today and pay tomorrow.
It is so obvious to all but economists that a point would be reached of debt saturation (the inability to borrow one more dollar as credit limits were reached). That is a tipping point which we reached thanks to the economic downturn of the Great Recession when housing equity vanished.
Strange things happen at tipping points. Change usually benefits those that have the means to profit, even those who initially suffer. The key is either to have either enough money to ride it out or flexibility to profit. The overwhelming majority of Joe’s have neither money or flexibility.
For the Joe’s who have a job, they do not have the means to adjust to currency fluctuations, low interest rates and possibly even better jobs a few hours away. They are caught flat footed with no monetary reserves to be able to even execute a simple move. The economy is running Joe over. The Joe without a job is in survival mode.
No magic solutions exist although we swim in a sea of opinion and dogma. This cesspool for Joe Sixpack was designed and built by actions over the last 60 years by business and government and Joe Sixpack himself. No single solution will work as there are many causes. Some causes, like demographics (the oversupply of baby boomers), must be left to solve gradually over the next 40 years.
When you reach my age, you likely will have realized that many problems you face solve themselves as the solutions may be worse than the problem. This is definitely true for some of the economic ills. But others need intervention. The most important one is job creation. Having an abundant jobs market will lessen the pain on Joe. Everyone supports job creation – and yet most everyone puts limits on methodology used to create jobs.
Some want government jobs programs, some say the government cannot meddle in the private sector. Some say the USA has too many business laws, regulations, and restraints to market entry to be able to trigger real jobs growth – others say we need to regulate business more to protect poor Joe. There is no consensus – no compromise – and we remained locked on the tracks we have used for the last 60 years while the headwinds to job growth continue to build.
Continuing to use the dogma espoused by the left and the right ensures a continuing downward employment dynamic. The USA needs to attack unemployment in the same manner as going to war. This does not mean writing blank checks as building fertile ground for business to prosper and create jobs does not need to involve incentives or public sector programs. On the other hand, there should be small cost government sponsored field testing of a variety of concepts to create employment.
It is paramount and urgent that a solution to unemployment is found. Gridlock is not likely to be productive in this regard. Gridlock when times are good can be beneficial. Gridlock when times are bad can be very detrimental. The elected government is unlikley to take any significant actions in the new political environment.
The Fed and QE
QE2 is adding to the duress of Joe Sixpack by adding one more layer of uncertainty to private sector jobs growth. Disregarding protests to the contrary, QE2 was designed to weaken the dollar – driving commodity prices (spelled energy costs) up. Many argue a weaker dollar makes USA products more competitive on the world stage – and therefore creating more jobs. Even Nobel Laureate Paul Krugman has jumped on this bandwagon in a 19 November Op-Ed entitled “Axis of Depression”.
And about dollar debasement: leaving aside the fact that a weaker dollar actually helps U.S. manufacturing, where were these people during the previous administration? The dollar slid steadily through most of the Bush years, a decline that dwarfs the recent downtick. Why weren’t there similar letters demanding that Alan Greenspan, the Fed chairman at the time, tighten policy?
There is no provable correlation between a weakening currency and higher employment. Data demonstrates the reverse when comparing civilian employment participation rates with US dollar values. The employment participation rate is essentially the ratio of the civilian labor force to the total noninstitutionalized civilian population 16 years of age or over. This is a far more consistent employment metric then using unemployment rates which have had a mutating definition over the last 20 years, especially as normally employable people drift in and out of the labor force.
There can be no happy ending for Joe Sixpack in this economic environment until positive jobs growth can be triggered. And QE2 may be better at triggering jobs growth in emerging market countries than in the U.S. The subject of QE leakage to emerging markets has been discussed in past weekly reviews. See “A Case for Divesting Dollars“ and links to other previous articles on QE leakage contained therein.
Economic News this Week
No data this week is inconsistent with Econintersect’s one month forecast of a slowing economy approaching stall speed. The Weekly Leading Index from ECRI was “less bad” this week rising from -5.5% to -4.5%. The implication is that the economy will be less good six months from today. ECRI does not expect a double dip or recession within the next six months.
The four week moving average initial unemployment claims continued its slight downward trend this week under the important 450,000 level where real job creation is possible. This is the lowest level of initial unemployment claims since September 2008 (4 week moving average).
For interactive table and larger image, click here
Bankruptcy Filings this Week: Loehmann’s Holdings, American Media Operations, Local Insight Media Holdings, Vertis Holdings
Failed Banks This Week:
QE2 is a Double Edged Sword by Steven Hansen
A Case for Divesting Dollars by Steven Hansen
USA Funding Growth Worldwide by Steven Hansen