It is easy to be confused about the state of the economy. However, if we stop trying to figure out turning points, when a recession ends and an expansion begins, and start thinking about longer terms trends, things become a bit clearer.
Consumption accounts for about two-thirds of U.S. Gross Domestic Product (GDP). What kept GDP growing over the last expansion (2001-2007) was rising consumption, and what kept consumption growing was debt. The result was an ever shakier foundation that has now collapsed. The reason the expansion was built on debt was that despite the growth in GDP, real wages and household income trended downward. If we are going to have a healthy economic future we must ensure that structures are in place to reverse that trend.
The following chart, taken from the blog Mish’s Global Economic Trend Analysis shows just how critical consumption gains have been to economic recovery.
So, where are we today? The answer is not very promising. According to Bloomberg News:
Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department figures released yesterday. The Obama administration’s tax cuts, extended jobless benefits and a one-time Social Security bonus have helped mask the damage done by the worst employment slump since the Great Depression. Personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, yesterday’s Commerce report showed.
Without higher wages and income there won’t be any sustained increase in consumption, which means business investment will remain weak, and . . . well, you probably get the picture, no meaningful economic recovery.
Of course employment is also important (individual wages might not go up significantly but an increase in total employment could still generate an increase in total spending), but the news is no better on this front. In a previous post I highlighted (check out the chart) the fact that the private sector has almost stopped creating jobs. I quoted the business analyst Michael Mandel as follows:
Between May 1999 and May 2009, employment in the private sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period. It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years.
And of course this doesn’t even speak to the quality of the jobs; for example, involuntary part-time employment has soared.
Sadly, there is very little reason to expect any significant near term decline in unemployment. In fact, as a recent post at Mish’s Global Economic Trend Analysis noted: “If [past business cycle patterns] hold, unemployment will rise until 2011 or beyond. . . . Odds of a double dip recession similar to 1980-1982 are high after whatever inventory rebuilding and bottom fishing in housing ends.” [Check out the chart below from the same source–it shows how the past two expansions, unlike the previous seven, are marked by continuing increases in the unemployment rate.]
So—don’t confuse stabilization with recovery, and keep your eye on real fundamentals—majority living and working conditions.