I’ve been helping a friend with some minor research regarding factors behind the current strength of the US economy. However, the more rhetoric I see about the economy’s strength, the more I see signs of warning and dark clouds on the horizon for those outside the country's top income brackets. I Am Everyday People
Macroeconomics tells us the economy is summed up with the equation: C+I+G+NX = GDP, where C = consumer spending, I = investment, G = government expenditure, and NX = net exports. Consumer spending increased 20 percent between 2010 and 2016, and was seen as key to any economic growth. But it appears that trend may be slowing. While recent month-to-month figures were 0.6 percent and 0.5 percent in March and April, respectively, June was an anemic 0.2 percent. Given certain data, this should come as no surprise.
Consumer purchasing power continues to erode. Real wages may have grown 2.7 percent from this time last year, but a 2.9 percent gain in inflation leaves consumers a bit worse off. Other empirical data confirms the "good news story" is not as rosy for everyone as some might have us believe. Further, credit card debt is surpassing record levels and consumers struggle to keep up with the bill. In fact, 43% of middle class Americans currently struggle to buy basic necessities. It could even get worse as consumers see their dollars buy them even less once the net effect of current trade wars sets in.
Sharing Is Caring, Right? A large factor in recent the current economic surge was companies increasing capital investment when it became clear the Republican party would control both Capitol Hill and the White House, and make tax breaks a main feature of their economic plan. Further, companies began registering decent profits as the effects of the cuts kicked in. Many expected the 2017 tax bill would result in companies reinvesting in their windfall in new capital and higher wages. Unfortunately, this has not been the reality and the majority of American workers do not have the extra disposable income they were told they would have. Instead, corporations have used a significant amount of the tax bill’s benefit to buy back shares of stock, leaving fewer shares to be purchased and remaining shares with a higher stock price. Given the ongoing decline in real wages described above, it does not appear middle-class families will enter equities markets more directly any time soon, excluding them from one of the hottest areas of growth in the American economy. There is no question the recently passed tax bill, which lowered rates for companies and consumers alike, is disproportionately benefiting the wealthy. As a deflection, many often point to the stock market as the premier barometer for American economic health. The thinking goes, "the stock market is up so everyone must be doing better." But that metric is misleading. To begin, 84 percent of current stocks are owned by only 10 percent of American households, meaning the majority of consumers appear unable to buy a piece of the markets and cannot take advantage of current strong growth trends. But that may not matter as some experts believe equities are severely overvalued and are due for a significant readjustment downward. As of this writing, the Dow Jones Industrial Average is only 100 points above where it was at the start of 2018. This year's drops have been some of the largest in decades, though that does not seem to be spooking investors too much. The Longer Term
So consumer spending is weakening, and companies do not appear to be making the investments policymakers and financial analysts hoped they would. Turning to our earlier equation, one could hope the country’s net exports might pick up some slack. However, given the current strength of the US dollar, our goods become more expensive in foreign markets, a problem that is exacerbated when countries apply reciprocating tariffs on goods they import from America. A blockbuster trade deal might help a bit, but new trade deals are not in the headlines much these days, except for a new arrangement with Mexico that is far from certain. In fact, investment in America appears to be on the wane. America’s trade deficit forecast is the worst it has been in a while. And though some pundits have celebrated this year's second quarter GDP growth of 4.0 percent, a level not seen since 2014, the significant jump likely has more to do with getting inventory out the door prior to tariffs taking hold than it does any kind of sustained trend. Instead of thinking the American economy is an unstoppable force, it is more likely it is on a collision course with an immovable object: long term debt. If not dealt with properly, this will deal everyday consumers another crushing blow they might not be able to withstand. Some analysts and policymakers believe entitlement spending is what needs to be trimmed in order to put the country on a more responsible fiscal path. However, not only will cutting Social Security, Medicare, and Medicaid increase the financial duress of those in economically precarious positions; it is not the culprit they would have you believe. So What? A cursory glance at the American economy would have you think things are going great. They are. For a few. For most Americans, however, the economic landscape is not as rosy. It’s not as destitute and bleak as it was during the worst days of the financial crisis, thanks in large part to prudent moves to stabilize the system and get the train back on track. Unfortunately that major gut punch exposed the lackluster scenario that had been unfolding for decades leading up to it. If past performance is any indication of future results, the 10-year/2-year yield spread’s continued decline has America closer to recession than it has been in a decade. (As of this writing, it is at 0.22.) Serious course corrections are needed if we are going to shore up and jumpstart the economic standing of the middle class; the heart of the American economy. Current economic policy decisions - and assumptions that everyone is sharing in the good times - are doing anything but that.