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Stock Market Rally Does Not Equal Economic Growth

We are experiencing a mini-rally in the stock market.  This is good for our retirement accounts and other accounts tied to the stock market.  But this can all change very easily in the opposite direction because of the volatile nature of the stock market.  The important thing to understand is that a stock market rally does not necessarily translate into a better economy.

Here is a graph showing the Dow Jones Industrial Average since the beginning of this year:

The DJIA is currently around 10,000.  It hit 14,000 in the 4th quarter of 2007. 

Many people talk about the virtues of the predictive quality of the stock market.  The stock market is not some inanimate machine.  People operate in the stock market with various imperfections, perceptions and beliefs - far from perfect.  It is also very prone to a herd mentality, bubbles and shocks - so it’s very far from perfect as a predictor of our economic future.  Besides, if it was such a great predictor why didn’t the stock market figure out the internet stock bubble and our current economic crisis.  It didn’t because the participants were caught up in all euphoria related to the internet and the housing market.  People ignored the signals that were present

Our economy is complex and there are many indicators to look at to determine the health of our economy.  The stock market with its imperfections is just ONE of the indicators to look.  There are many other such as unemployment, household debt levels and consumer spending.  The point is that it’s nice that the stock market is rallying but that doesn’t mean that a REAL economic recovery is coming any time soon.

Good luck.

National Infrastructure Bank

Mort Zuckerman, Editor of U.S. News & World Report, has a opinion editorial this morning in the Financial Times entitled: The Free Market is not up to the Job of Creating Work.  In this piece he laments about the horrible job market in the U.S and questions whether the private sector is up to the challenge of filling the sizeable jobs gap.  I am glad someone in traditional media is realizing how bad things really are.  His opinion piece is interesting for what it mentions: a National Infrastructure Bank.

He says something that on its face may sound astounding to some: “This is the only recession since the Great Depression to wipe out all job growth from the previous business cycle.”  This is not very astounding because the reality is job growth in the private sector for past 10 years has been meager to non-existent.  But that aside, Mr. Zuckerman at least acknowledges the huge challenge our economy faces with creating jobs.

This Great Recession has created a huge hole in the jobs market.  According to the Economic Policy Institute:

Since the start of the recession in December 2007, an estimated 8.0 million jobs have been lost.  This number includes both the 7.2 million jobs lost in the payroll data as currently published plus the announced preliminary benchmark revision of -824,000 jobs to last March’s employment level.  And even this number understates the magnitude of the hole in the labor market by failing to take into account the fact that the population is always growing.  To keep up with population growth, the economy needs to add approximately 127,000 jobs every month, which translates into 2.7 million jobs over the 21 months since the start of the recession. This means the labor market is currently 10.7 million jobs below what’s needed to return to the pre-recession unemployment rate.  To demonstrate how large this gap is and the level of growth needed to bridge it, consider the following: in order to fully fill in the gap in the labor market by September 2011, employment would have to increase by an average of 573,000 jobs every month for the next two years straight.

With the employment situation very bleak, consumer confidence low and household debt levels still high, it is very hard to see how the private sector can generate enough new jobs to power a real economic recovery.  So, where will the impetus for job growth and economic recovery have to come from - you guessed it - government programs.  This is a sad reality for Blue Dog Democrats and Republicans. 

The National Infrastructure Bank is one such government program that not only would help address the huge jobs gap but would also address the dire situation regarding our national infrastructure needs.  The National Infrastructure Bank would act like an investment bank that evaluates public infrastructure projects and assemblies the financing for the projects.  The purposes of the National Infrastructure Bank are to help with new job creation and to use federal resources more effectively and to raise additional funding.

The National Infrastructure Bank would work like this:

Any project seeking federal participation over a set dollar threshold would have to be submitted to this bank. (Smaller projects would be left to states, cities, and towns, perhaps with an accompanying federal grant to be used at the discretion of the state or local government.) Rather than receiving grants through pre-set federal formulas or privileged congressional payments, states, cities, or other levels of government would come to the bank with proposals they wished to pursue. These proposals—for, say, a new or improved highway, a subway, expanded airport, or harbor improvements—would outline the investment that state and local governments would be willing to make, what the users of the project would be expected to pay, and what support was wanted from the federal government.

Proposals for infrastructure investment would still come from the state and local governments.  This Infrastructure Bank is mostly about allocation of federal capital dollars more effectively and to streamline the current federal funding process.  Sounds great: allocating resources more effectively and getting people back to work. 

President Obama, during the election campaign, talked about and supported the idea of a National Infrastructure Bank.  Well, progressive minded Democrats are trying to make the National Infrastructure Bank a reality.  On May 20, 2009, Congresswoman Rosa DeLauro introduced H.R. 2521 - National Infrastructure Development Bank Act of 2009.  The bill appears to be stuck in committee - House Financial Services Committee. 

To the chagrin of Blue Dog Democrats and Republicans, we need to make jobs a priority and there should not be anything very controversial about a National Infrastructure Bank.  This needs to happen.  People don’t have any more time to lose. 

 

President’s Chief Economic Advisor Rejects “New Normal”

Larry Summers, the President’s chief economic advisor, has rejected the idea of a “new normal” for economic growth.  The “new normal” means one to two percent annual future economic growth - hardly enough growth to generate enough jobs.  This “new normal” would mean significant high and long-term unemployment.  It matters what Larry Summers believes.

It matters what Larry Summers believes because obviously he has the President’s ear on economic issues.  Now, it could be that Larry Summers believes in the “new normal” but for political reasons he has to reject it in public.  The “new normal” is an incredible liability for incumbent national politicians because what matters the most are JOBS.  Jobs would be in very short supply in the “new normal”.

Publicly, this is what Larry Summers said:

“I would be very reluctant to accept the idea that the American economy no longer has the potential to grow rapidly,” Summers told a forum in New York yesterday organized by Bloomberg LP, the parent of Bloomberg News. “The American people have not become less capable of entrepreneurship. They have not become less dedicated to hard work, and the productive potential of this economy has not declined.”

Fine, let’s assume he believes what he says.  “Old normal” growth means 4% - 5% annual growth.  Does this assume we have an economy still driven by high consumption?  We have done nothing to change this model.  If, economic growth is dependent on consumption but people are unemployed right now or are still loaded with debt how can one expect consumption to lead us to economic growth?

The jobs hole left by this Great Recession is very deep.  According the Economic Policy Institute:

Since the start of the recession in December 2007, an estimated 8.0 million jobs have been lost.  This number includes both the 7.2 million jobs lost in the payroll data as currently published plus the announced preliminary benchmark revision of -824,000 jobs to last March’s employment level.  And even this number understates the magnitude of the hole in the labor market by failing to take into account the fact that the population is always growing.  To keep up with population growth, the economy needs to add approximately 127,000 jobs every month, which translates into 2.7 million jobs over the 21 months since the start of the recession. This means the labor market is currently 10.7 million jobs below what’s needed to return to the pre-recession unemployment rate.  To demonstrate how large this gap is and the level of growth needed to bridge it, consider the following: in order to fully fill in the gap in the labor market by September 2011, employment would have to increase by an average of 573,000 jobs every month for the next two years straight.

Get that - just to get back to normal job growth we need 573,000 jobs every month for 2 years.  As of last month (Septemeber) we lost 263,000 jobs.  If we don’t have jobs or are worried about losing our current jobs then we are not going to consume.  So, again where will this economic growth of 4% - 5%, that Larry Summers believes in, going to come from?

Is Mr. Summers counting on the government’s economic stimulus plan?  Could be.  Only problem is that it may be too small to provide that much growth:

The most important question facing Obama that day [December 16, 2008] was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection. The memo argued that the stimulus should not be used to fill the entire output gap; rather, it was “an insurance package against catastrophic failure.” At the meeting, according to one participant, “there was no serious discussion to going above a trillion dollars.”

This all matters because as the above quote shows Mr. Summers may not be giving the President the full extent of our economic problems.  And if Mr. Summers doesn’t believe that the “new normal” is possible and is advising the President accordingly how can the Administration develop policies that combat this “new normal”?  For our sake, I hope there is someone in the White House advocating the possibility of this “new normal”.

 

Jobs, Jobs, Jobs

The talking heads in the business media are already talking “jobless recovery”.  How can anyone call this a ‘recovery’ when you have huge segments of the population unemployed?  Yesterday, the Labor Department released the jobs numbers for September 2009 and they were UGLY.

Here is the Bureau of Labor Statistics report.

We lost 263,000 jobs in September.  From May through September, job losses averaged 307,000 per month. Since the start of the recession in December 2007, we have lost close to 8 million jobs.

The OFFICIAL unemployment rate is 9.8%.  But the broader unemployment rate number that includes people who are underemployed is 17%.  Since the start of the recession in December 2007, the number of unemployed persons went from 7.6 million to 15.1 million. 

This is a huge hole to get out of and required more than the weak stimulus that was passed this past February.  We needed a stimulus that focused more on JOBS and a lot less on tax rebates.  Why the hell not have a 2009 version of the WPA?

For some perspective on how deep is the “jobs hole” consider this from the Economic Policy Institute:

To keep up with population growth, the economy needs to add approximately 127,000 jobs every month, which translates into 2.7 million jobs over the 21 months since the start of the recession. This means the labor market is currently 10.7 million jobs below what’s needed to return to the pre-recession unemployment rate.  To demonstrate how large this gap is and the level of growth needed to bridge it, consider the following: in order to fully fill in the gap in the labor market by September 2011, employment would have to increase by an average of 573,000 jobs every month for the next two years straight.

We are not even close to any real recovery.  Don’t believe the hype and spin about a “jobless recovery”.

Good luck.

Mervyn King: “It’s the level, stupid….”

Mervyn King is the Governor of the Bank of England.  Here is more of the quote: “It’s the level, stupid—it’s not the growth rates, it’s the levels that matter here”.  What he is saying is that too many people are focused on the month to month changes or year to year changes to economic indicators instead of focusing on the bigger picture - how bad the situation really is.

I got this quote from reading Mohamed El-Erian’s article in the Financial Times.  Dr. El-Erian coined the phrase the “New Normal” for economic growth.  While I agree with his conclusion and what he said in his article, I don’t entirely agree with his analysis for the “New Normal”.

In his FT article he talks about how are we are reverting back to same analytical framework that encouraged “short-termism” and got us into this mess. 

Investors have not yet accepted his [Mervyn King’s] insight that the absolute levels of income, debt, wealth and unemployment, not just the rates of change, are what matters today.  They need to, and soon.

And we see this analytical framework at work everyday in the traditional business news media.  Take a look yesterday, a day in which new personal consumption expenditures are released:

U.S. Consumer Spending Jumps the Most Since ‘01 in Sign Economy Rebounding

Funny, if you click the link the title of the story changes to something less dramatic.

So, let’s take a graphical look at some of the indicators that Dr. El-Erian mentioned in the above quote.  First, income:

Interesting, could it be that the top income brackets are driving this higher?  But we still have a way to go to get back to “normal”.  Or will there be a “new normal”?  How about consumption:

Wow, this is a huge problem.  We have done nothing to change our economic growth model that relies heavily on consumption (70% of GDP).  If we maintain the status quo in terms of our economic growth model we have a very long long way back to “normal”.  But again, a “new normal”?

What about debt levels? 

Not a pretty picture.  If we look at total levels of debt this is still too high.  Then how about the worst constraint on economic growth:

Enough said with this.

As Dr. El-Erian has said:

The longer it takes for investors and the policy consensus to shift to the appropriate analytical framework - one that factors in levels rather than just rates of change - the greater the risk of disappointment in 2010.

I would stress that if we don’t change our framework and realize we are heading into a “New Normal” with incredibly high structural unemployment and unprepared to deal with that we are destined to far greater problems than a bear market.

Good luck.

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