Economic Storm Clouds Ahead

[Auburn85 434]

http://www.huffingto...ics&ir=Politics

Robert Reich

Economic forecasters exist to make astrologers look good. But the recent jubilance is enough to make even weather forecasters blush. "Just look at the bull market! Look at home prices! Look at consumer confidence!"

Please.

I can understand the jubilation in the narrow sense that we've been down so long everything looks up. Plus, professional economists tend to cheerlead because they believe that if consumers and businesses think the future will be great, they'll buy and invest more -- leading to a self-fulfilling prophesy.

But prophesies can't be self-fulfilling if they're based on wishful thinking.

The reality is we're still in the doldrums, and the most recent data gives cause for serious worry.

Almost all the forward movement in the economy is now coming from consumers -- whose spending is 70 percent of economic activity. But wages are still going nowhere, which means consumer spending will slow because consumers just don't have the money to spend.

On Thursday the Commerce Department reported that consumer spending rose 3.4 percent in the first quarter of this year. But the personal savings rate dropped to 2.3 percent -- from 5.3 percent in the last quarter of 2012. That's the lowest level of savings since before the Great Recession. You don't have to be an economic forecaster, or an astrologer, to see this can't go on.

Yes, home prices are rising. The problem is, they're beginning to rise above their long-run historical average. (Before the housing crash they were were way, way above the long-run average.) So watch your wallets. We've been here before: The Fed is keeping interest rates artificially low, allowing consumers to get low home-equity loans and to borrow against the rising values of their homes. Needless to say, this trend, too, is unsustainable.

What about the stock market? It's time we stopped assuming that a rising stock market leads to widespread prosperity. Over 90 percent of the value of the stock market -- including 401(k)s and IRAs -- is held by the wealthiest 10 percent of the population.

Moreover, the main reason stock prices have risen is corporate profits have soared. But that's largely because corporations have slashed their payrolls and keep them low. Which brings us full circle, back to the fundamental fact that wages that are going nowhere for most people.

Not even fat corporate profits are sustainable if American consumers don't have enough money in their pockets. Exports can't make up for the shortfall, given the rotten shape Europe is in and the slowdown in Asia.

So don't expect those profits to continue. In fact, the new Commerce Department report shows that corporate profits shrank in the first quarter, reversing some of the gains in the second half of 2012.

And, by the way, the full effect of the cuts in government spending hasn't even been felt yet. The sequester is going to be a large fiscal drag starting next month.

Look, I don't want to rain on the parade. But any self-respecting weather forecaster would warn you to zipper up and take an umbrella. Don't be swayed by all the sunny talk. There are too many storm clouds ahead.

ROBERT B. REICH, Chancellor's Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers "Aftershock" and "The Work of Nations." His latest is an e-book, "Beyond Outrage," now available in paperback. He is also a founding editor of the American Prospect magazine and chairman of Common Cause.

[Bottomfeeder 244]

Bill Bonner has a nice take on things today with his article. We're screwed.

[RunInRed 16,991]

One problem, he forgot to mention unemployment is going down and payrolls are actually increasing.

[Bottomfeeder 244]

One problem, he forgot to mention unemployment is going down and payrolls are actually increasing.

Seasonal hiring. It's only temporary, which lends to the fact that we are not recovering. In fact, realistically, we are moving in the oppostie direction with government spending almost 50% of the money the feds release. That's over $40 billion per month. I don't where the other almost 50% is going, but the small business owners are not getting it.

[autigeremt 6,970]

Things are AUsome! This guy doesn't know what he's talking about. Stop the resistance and bow to the almighty.

[RunInRed 16,991]

Which season?

[Bottomfeeder 244]

Pick any season you want. They all suck.

[autigeremt 6,970]

Pick any season you want. They all suck.

But it sucks less, so it's all great!

[RunInRed 16,991]

Well, just to put the facts on the table, we've added over 6.5 million private sector jobs back since the start of the recession. That's progress by any measure.

[IndianTiger 95]

Auto sales in US and North America is at 15 million this year, compared to 9.5 million in 2009 (pre recession we were close to 16 million). That's the second largest purchase for households (other than a house). Yes, jobs are coming back and could be better. Having said this, doesn't hurt to be cautious..

[TitanTiger 20,708]

I don't think his point was that there aren't economic data points that are good right now. His contention is that the underlying fundamentals are still not good, so the good stuff going on right now isn't sustainable for much longer.

[RunInRed 16,991]

I don't think his point was that there aren't economic data points that are good right now. His contention is that the underlying fundamentals are still not good, so the good stuff going on right now isn't sustainable for much longer.

FWIW, I disagree with this line of thinking...

The initial article tried to make this point ... however, my counter is that we are adding jobs -- that's real sustainable spending power in peoples pockets every month.

[TitanTiger 20,708]

Actually that wasn't his point at all. His point was that wages were stagnant and thus the current growth that's fueled mainly by consumer spending can't continue. He did mention payrolls being slashed but he merely said that companies have kept them low, not that they hadn't added back any jobs. His primary point is consumer spending cannot continue to bolster things while wages are going nowhere and savings are depleting.

[IndianTiger 95]

Good point about wage growth,..here is an article on that.

http://blogs.wsj.com/moneybeat/2013/04/16/the-best-indicator-of-u-s-health-is-wage-growth-or-lack-thereof/

The best indicator of the economy’s true health was released this morning. It wasn’t the jobs report. It wasn’t gross domestic product. It wasn’t consumer prices or housing starts orindustrial production.

It was wages.

The Bureau of Labor Statistics released its report on real earnings — wages adjusted for inflation — at 8:30 a.m., in conjunction with the consumer prices index. The latter gets all the attention, but if you want to understand the true health of the economy, the former is the one to watch.

Average weekly earnings rose 0.3% in March from a year ago, using the data from the consumer prices report to adjust for inflation, according to this morning’s report from the Bureau of Labor Statistics. That’s a static growth rate, and it’s one more drag on a working class that hasn’t recovered from the crash of 2008.

The good news in all this: wages overall are up since the recession’s start. The bad news: They’re down from the end of 2008, broadly flat over the past decade, and on an inflation-adjusted basis, wages peaked in 1973, fully 40 years ago. Apart from brief lapses, like in the late 1990s, wages have been falling for a generation.

Of course, in the upside down world of the markets, where a bad economy means lower rates from the Federal Reserve, this report isn’t going to make the markets shake, today. But over the long term, wage growth is the best tell on the economy’s true health and the market’s trajectory.

Wage growth provides a clean, clear picture of the health of the citizenry. If wages are rising at a healthy clip, it speaks to a healthy labor force. If wages aren’t growing, it speaks to a labor force under pressure. An economy as dependent upon consumer spending as the U.S. can’t remain strong if wages aren’t growing.

A single, real-world example illustrates this. In the first decade of this century, when housing prices were doubling in a matter of years, wages were largely stagnant. You didn’t need to know about securitizations or leverage to understood that housing prices couldn’t outpace wage growth at that exponential rate without repercussions.

“We’re just not going to see big increases in wages when we have unemployment this high,” said Heidi Scheirholz, an economist at the Economic Policy Institute. Stagnant wages are hitting low-income workers the most, she noted, but it’s also affected the middle class as well. People with college degrees haven’t seen any wage growth in a decade, she noted. “Wage stagnation is about so much more than people not having the right skills.”

Flat of falling wages have been papered over for years; consumers have taken on more credit, for instance, and raided their savings. The Fed’s monetary policies since 2008 have also cushioned some of the blow. But none of that is a panacea.

“Neither low interest rates nor low savings are likely to prove sustainable over the long term,” Russ Koesterich, chief investment strategist at BlackRock’s iShares Funds, wrote last month. “The Federal Reserve is likely to eventually raise rates and without faster personal income growth, consumers are likely to run out of savings, especially considering the massive amount of debt they are still unwinding.

“If consumption and the broader economy are to remain resilient going forward in the face of consumer deleveraging, they will need to be supported by an improving labor market leading to faster personal income growth.”

Obviously, wage growth is tied at the hip to job growth, and that presents another problem. At the current rate of jobs growth, EPI’s Sheirholz said, the nation won’t reach full employment again until 2019. “We’re going to see downward pressure on wage growth for a very long time,” she said.

That means that the next five years could look a lot like the last five years. Except for the generational low in the stock market, of course.

[RunInRed 16,991]

Actually that wasn't his point at all. His point was that wages were stagnant and thus the current growth that's fueled mainly by consumer spending can't continue. He did mention payrolls being slashed but he merely said that companies have kept them low, not that they hadn't added back any jobs. His primary point is consumer spending cannot continue to bolster things while wages are going nowhere and savings are depleting.

Consumer spending has always fueled growth ... I don't agree with the distinction he is attempting to make. And I stand firm on my point ... even if current wages are stagnant, we're adding workers every month who will continue to be able invest in the economy. That's a good thing.

[TitanTiger 20,708]

Consumer spending has always fueled growth ... I don't agree with the contrast he's making. And I stand firm on my point ... even if current wages are stagnant, we're adding workers every month who will continue to be able invest in the economy.

It's not that simple. What it's being spent on matters for instance. If wages are stagnant, then more and more of that spending is happening on necessities and not goods and services. The latter is what really helps an economy with consumer spending.

While none can deny the critical role of personal consumption expenditures in our economy, what far too many do not understand is how far and how fast expenditures have changed

In 2011 expenditures on goods contributed $3.6 trillion in 2011, nearly one-fourth of total GDP. That is a very significant portion of expenditure yet only 7% of GDP today is expended on durable goods such as automobiles and furniture. Non-durable goods, such as food, clothing and fuel contribute 16% toward GDP.

Per the U.S. Census Bureau’s September 2012 report, Americans spent $45.8 billion at gas stations. That total actually exceeded what we spent as a nation in restaurants and bar $44.1 billion. But for all the expenditures we make on goods, it is our service expenditures which actually provide the bulk of personal consumer expenditures.

This was not always the case in America. As late as 1968, American expenditures on total goods represented nearly 40% of GNP. Today, expenditure on services actually exceeds that amount as they totaled 46% in 2011.

http://www.policymic.com/articles/15097/us-gdp-is-70-percent-personal-consumption-inside-the-numbers

It's like WalMart touting how many people they employ, but when those people make minimum wage or a little above, it's certainly better than nothing but it isn't anything to be all that excited about either. These aren't the kinds of jobs that will have long term positive effects on the economy. Likewise, if wages are stagnant and payrolls are still lagging (even if they've improved), it's not enough to sustain growth long term. His point is solid.

[tgr4lfe 220]

I work at a private university and have for 5.5 years. The past 1.5 years we have NOT gotten a cost of living allowance, which had been pretty consistent over the years even before I got here from what I'm told. While our salaries are stagnant, our health insurance has gone up over 3% increase and school tuition as gone up almost 5% EVERY year. We also have a K-12 under the same umbrella, which is where my kids go to school (only thanks to a 75% tuition discount). My tuition payment is increasing this year b/c tuition overall increased. So, the article poster is right in that IF wages stay stagnant then things will not hold steady.

[IndianTiger 95]

If enough jobs are created, have to impact wage growth as labor becomes more in demand. Its possible we get there, but we need more robust job growth.

[TitanTiger 20,708]

If enough jobs are created, have to impact wage growth as labor becomes more in demand. Its possible we get there, but we need more robust job growth.

This is true. There's a tipping point. I just don't think we're anywhere near that point right now.

[RunInRed 16,991]

The transition of us from a goods to a services society is not a new concept ... yes the paradigm has shifted from the 60s but that's not necessarily a bad thing. And as a relates to necessity vs. disposable income goods, I'm not quite sure why we're picking hairs between producing a box of cereal and building a yacht ... there's an input and output associated with both.

[TitanTiger 20,708]

The transition of us from a goods to a services society is not a new concept ... yes the paradigm has shifted from the 60s but that's not necessarily a bad thing. And as a relates to necessity vs. disposable income goods, I'm not quite sure why we're picking hairs between producing a box of cereal and building a yacht ... there's an input and output associated with both.

There is, but the latter tends to pay better than the former. The point is that the economy doesn't grow and prosper when people are spending most of their income on basic needs. It just treads water...at least if you're going to depend on consumer spending as 70% of your economic activity.

And this isn't splitting hairs. Economics are complex, especially in a world economic power like the United States. You can't just point to a handful of stats and come to a quick and easy conclusion. These issues are layered and the details matter.

[IndianTiger 95]

The emphasis on STEM subjects (Science, Engineering, Math and Technology) is good to see, but we lost atleast a decade in my opinion. I would also add Manufacturing to the above 4. We need to create future entrepreneurs and job creators that produce high paying jobs :-)

[autigeremt 6,970]

Manufacturing is down and will continue to decline as long as we have leadership (not just the President) who is intent on America becoming the servants of the world. We are a service sector nation with a declining manufacturing base as China, India, and others take hold.

[autigeremt 6,970]

The transition of us from a goods to a services society is not a new concept ... yes the paradigm has shifted from the 60s but that's not necessarily a bad thing. And as a relates to necessity vs. disposable income goods, I'm not quite sure why we're picking hairs between producing a box of cereal and building a yacht ... there's an input and output associated with both.

True. But which one elevates median incomes?