Michael Grunwald: Last Election Illegitimate. The US Economy Is Awesome

December 29, 2014 0 Comments

Personal financial situation getting you down? Feeling that you are getting slightly poorer? Have you once again left the labor market because you couldn’t find the job you are looking for? Pay no attention to any of that. Pay more attention to the 5% GDP growth the economy experienced in Q3. Pay attention to all of the jobs created in the last month. Don’t forget the Dow reaching a new all-time high for the umptheeth time last week. This is basically what Politico’s Michael Grunwald is telling readers, as the US economy is not as bad as the naysayers would like for you to believe. Everything is awesome!

From Politico:

Good news! The U.S. economy grew at a rollicking 5 percent rate in the third quarter. Oh, and it added 320,000 jobs in November, the best of its unprecedented 57 straight months of private-sector employment growth. Just in time for Christmas, the Dow just hit an all-time high and the uninsured rate is approaching an all-time low. Consumer confidence is soaring, inflation is low, gas prices are plunging, and the budget deficit is shrinking. You no longer hear much about the Ebola crisis that dominated the headlines in the fall, much less the border crisis that dominated the headlines over the summer. As Fox News host Andrea Tantaros proclaimed earlier this month: “The United States is awesome! We are awesome!”

Come to think of it, the 62 percent of Americans who described the economy as “poor” in a CNN poll a week before the Republican landslide in the midterm elections were also wrong. I guess that sounds elitist. Second-guessing the wisdom of the public may be the last bastion of political correctness; if ordinary people don’t feel good about the economy, then the recovery isn’t supposed to be real. But aren’t the 11 million Americans who have landed new jobs since 2010 and the 10 million Americans who have gotten health insurance since 2013 ordinary Americans? It’s true that wage growth has remained slow, but the overall economic trends don’t jibe with the public’s lousy mood. And the public definitely does get stuff wrong. A Bloomberg poll this month found that 73 percent of Americans think the deficit is getting bigger, while 21 percent think it’s getting smaller and 6 percent aren’t sure. In fact, the deficit has dwindled from about $1.2 trillion in 2009 to less than $500 billion in 2014. My favorite part is the mere 6 percent who admitted ignorance; 73 percent are definitely sure the shrinking deficit is actually growing.

The point isn’t that the midterm election’s discontent was illegitimate. The point is that Americans should cheer up! Six years ago, the economy was contracting at an 8 percent annual rate and shedding 800,000 jobs a month. Those were Great Depression-type numbers. The government was pouring billions of dollars into busted banks, and experts like MIT’s Simon Johnson were predicting that the bailouts would cost taxpayers as much as $2 trillion. In reality, the bailouts not only quelled the worst financial panic since the Depression, they made money for taxpayers. Nevertheless, last week, after the government sold its stake in Ally Bank, its last major holding in a financial institution, Johnson complained to The New York Times about the “unfortunate and inappropriate message” being sent by people pointing out the bailouts were actually profitable. In this holiday season, can’t we be a little bit happy we didn’t have to waste the $2 trillion he thought we were going to waste?

For the most part, Americans should cheer up, but only if they have accepted some terribly low standards. But it’s like Grunwald says: if Americans aren’t feeling good about their economic situation, then the recovery is therefore illegitimate and inconsistent with the data. If the data is correct, it means fewer citizens are suffering each and every single month. However, one can easily look at the same data (which much better due diligence) and determine that the US economy is not necessarily as strong as the BEA projects.

For example, I’ve already pointed out that two-thirds of the largest increase in revisions regarding consumption came in the form of Health Care services. As I have said before, either it is considered a good think that more people have income to spend on health care or federal mandates require people must purchase health care insurance. Similar to the new GDP retrofit that added ‘intangibles’ in investment spending. But even when you consider the Health Care spending bump in PCE, this component is still nowhere near its pre-recession peak, or any peak for that matter.
Nominal Personal Expenditures
Let’s see. Our annualized peak in PCE was 5.3% in July 2011. The economy is currently experiencing 4% PCE
annualized. The economy hasn’t had a YoY PCE that low since May 2014, July 2008, November 2002, and so on and so forth. If the economy is truly recovering in any meaningful way and the growth of the consumer is back, you would think personal consumption would be closer to the peak. Instead, we see that PCE is closer to the trough, which are levels usually associated with recession.

Put its easy to see why personal consumption hasn’t taken off during this recession. Incomes have not grown as much during this economic expansion. When we look at personal income without government transfers and dividend income, all that is left to look at is Compensation of employees. This is 62% of personal income, and by looking at this; incomes haven’t exactly taken off either.

Without proportional increases in incomes, there is really no other way to increase personal consumption without forcing consumers to allocate personal consumption. The general flowchart follows: More spending, more business sector investment, more employment, and more income growth. We’ve experienced plenty of growth in all of these sectors, except for incomes. In 2012, the average employment growth was 186,000, 194,000 in 2013 and its already estimated to be 250,000 + for the year 2014. We won’t know until the Employment Situation releases next
week. The point is, there is no shortage of employment and if the US economy were really taking off, as everyone seems to claim, income would be among the first to show it. Not just compared to last year, but in regard to historical comparisons.

And while its great that the economy is creating so many jobs year after year, you also need to consider the types of jobs being created. I already know (through looking at the numbers) that majority of the jobs created were low wage, unskilled service sector jobs in the Retail Trade, Temporary and Leisure & Hospitality industries. This is best reflected in Average Hourly Wages of Production and Non-Supervisory employees.

The growth of average hourly wages is an indicator of how much growth in income employees are experiencing, relative to the growth in the overall labor market. The basic premise: if wage growth outpaces employment, hourly earnings will grow substantially. If not, the growth in hourly earnings tends to stall.

The idea around average hourly earnings is to track how strong the growth in the labor market truly is. Increased growth in average hourly earnings indicates that people are leaving their lower paying jobs to take advantage of higher paying work. Instead, what we have is relatively stagnant growth, which means employees are finding jobs at the lowest possible wage that can be achieved. Again, we see this growth hovering around the troughs of previous recessions, which is not an indicator of a very vibrant recovery.

Very few deny that economy is much worse than it was during the aftermath of the 2008 recession. However, the point of tracking a economic recovery is not evaluating if the economy is performing worse than it was during the recession. The purpose is to track whether or not the economy is performing just as good (if not better) as the previous business cycle expansion, and most of the data shows that it isn’t. This is why most people are not as optimistic of their overall view of the economy. Until the economy experiences some meaningful changes, this sentiment will stick with majority of Americans for quite a while.

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