Apocalypse Soon? Uneasiness with The Economy

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Seven in 10 Americans say the country is on the wrong track. Americans are unhappy, worried and pessimistic, and their spending is down according to a University of Michigan report. But the same report shows that consumer sentiment is up. Consumer confidence is up, according to the Conference Board, and our own Consumer Demand Index indicates that spending plans are up.

What accounts for this dichotomy? Perhaps it could be the normalcy bias, a desire for “normalcy” so strong as to feed a willingness to overlook contrary evidence. Or perhaps our uneasiness is an example of the “wisdom of crowds”, James Surowiecki's theory that in aggregate, opinions of a wide cross-section of people are more accurate than those of experts.

Frankly, I'm uneasy, unhappy, worried, and pessimistic.

The protracted and uneven recovery from the Great Recession has led most Americans to conclude that the US economy has undergone a permanent change for the worse, according to a new national study by scholars at Rutgers University. Seven in 10 Americans now say the recession's impact is permanent, up from half in 2009 when the recession officially ended.

Despite sustained job growth and lower levels of unemployment, most Americans do not think the economy has improved in the last year or that it will in the next. Just one in six Americans believe that job opportunities for the next generation will be better than theirs have been; five years ago, four in 10 held that view.

Much of the pessimism is rooted in direct experience. Fully one-quarter of the public says there has been a major decline in their quality of life owing to the recession, and 42% say they have lower salary and less savings than when the recession began, while just 30% say they have more.

The public also paints an extremely negative picture of American workers as unhappy, underpaid, highly stressed, and insecure about their jobs. Americans are also pessimistic about the future, and sharply critical of Washington policymakers. Only a quarter think economic conditions in the United States will get better in the next year, and just 40% believe their family's finances will get better over the next year.

The Economy gets a downgrade: The updated budget and economic outlook recently released by the nonpartisan Congressional Budget Office (CBO) contained good news about
corporations, but bad news about the rest of the economy. According to Harry Stein of the Center for American Progress, the CBO now estimates that the economy will grow even more slowly than it expected in its previous economic outlook. It now expects that wages and salaries will comprise a smaller portion of that reduced economic pie.

The report suggests that troubling long-term trends in our economy are getting worse. Those trends include the stagnation of middle-class wages, which has gone on for over a decade. In addition, during the last 50 years overall employee compensation – including health and retirement benefits – has fallen to its lowest share of national income in more than 50 years, while corporate profits have climbed to their highest share.

Yet corporations are paying a much smaller portion of the total federal tax burden than they did in the past: about 10% today, vs. 30% in 1953.

While this is not an immediate emergency, since the annual budget deficit is very low right now, deficits will become unsustainable in the future, according to the CBO.

But there is a crisis for middle-class and low-income families right now: stagnant wages are not keeping up with rising expenses. American productivity has increased, but those gains are not making it to low- and-middle wage workers.

There has not been a real deleveraging: For several years, media headlines have been filled with references to a “deleveraging,” or a reduction in the level of US debt. But while the US financial system and banks are better capitalized, there has been no deleveraging in the broader economy. Consider these three points, courtesy of BlackRock investment strategist Russ Koesterich:

• US household debt remains high: Thanks to a significant write-off of mortgage debt, the debt burden of US consumers has been modestly reduced. By most measures, however, household debt levels are still too high. The past several years have witnessed a huge surge in student and auto loans. Overall, US household debt still stands at 103% of disposable income.

• Fueled by cheap credit, corporations have been adding new debt. Since the third quarter of 2010, corporate debt has increased every quarter. Over the past six quarters, corporate debt has been growing at an average annualized rate of around 9.5%, well above the pre-crisis average of 7.5%.

• Federal government debt has exploded. Outside of debt held by the Social Security Trust Fund, federal debt has risen by roughly $7.3 trillion over the past six years, an increase of 140%.

The net result is that non-financial debt has actually risen significantly since the financial crisis. Six years ago, notes Koesterich, non-financial debt was around 227% of GDP. Today, it's at a record 250%.

Does rising non-financial debt matter for the economy and for investors? Long-term, the answer is yes: implications include slower growth, a persistent headwind for consumers and vulnerability to even a modest rise in interest rates (this is particularly true for the federal government).

This is not a real economic recovery: Wages have been stagnant since the start of the supposed recovery. Real household income has fallen by 7%.

• The S&P 500 has increased 196% in five years; stock market valuations have been higher only three times in history: 1929, 1999, and 2007. But average Americans are not participating in the markets’ gains. They have instead parked record levels of cash ($10.8 trillion) in no-interest bank and money market accounts.

• The economy has added a few million jobs, but 11 million people have permanently left the labor market.

• The Federal Reserve balance sheet was $900 billion before the 2008 financial crisis; today it stands at $4.4 trillion. The correlation between that increase and the stock bubble is self-evident. So is the true purpose of quantitative easing: to save Wall Street, not Main Street.

• The housing market is worse for real people than it was in 2009. The national home price increase — 25% just since 2012 — has been centered in the usual speculative markets, aided and abetted by the Fed’s easy money, managed by the Wall Street hedge funds, and exacerbated by late-arriving flippers, who now account for 34% of all home sales. Mortgage rates have been falling for the past year, home builders have been reporting soaring confidence about the future, and the National Association of Realtors keeps predicting a surge in home buying any minute now.

Yet as analyst James Quinn points out, mortgage applications are in free fall, new home sales are at 1991 levels, and existing home sales are falling. Home prices have peaked and are beginning to roll over.. Home sales will be stagnant for the next decade, he predicts.

This will not end well: Crashes are coming, concludes Quinn. Quantitative easing will cease come October, unless the Fed and Wall Street can manufacture a new crisis to cure by printing more money. By every valuation measure, he writes, stocks are overvalued by at least 50%. By historical measures, home prices are overvalued by at least 30%.

Ten-year Treasuries are yielding 2.4%, while true inflation is north of 5%. With real interest rates deep in negative territory, the bond market is even more overvalued than stocks or houses. These simultaneous bubbles have been created by the Federal Reserve in a desperate attempt to keep this debt laden ship afloat. Their solution to a ship listing from too much debt has been to load it down with trillions more in debt. The ship is taking on water rapidly.

We had a choice, says Quinn: “We could have bitten the bullet in 2008 and accepted the consequences of decades of decadence, frivolity, materialism, delusion and debt accumulation. A steep sharp depression which would have purged the system of debt and punishment of those who created the disaster would have ensued. The masses would have suffered, but the rich and powerful bankers would have suffered the most. Today, the economy would be revived… Instead, the Wall Street bankers won the battle and continue to pillage and loot the national wealth while impoverishing the masses.

Discontent among the masses grows by the day. When the stock, bond and housing bubbles all implode simultaneously, all hell will break loose in this country. It will make Ferguson, Missouri look like a walk in the park.”

I fear he may be right; so like I said, I’m uneasy.

Dr. Roger Selbert is a trend analyst, researcher, writer and speaker. "Growth Strategies" is his newsletter on economic, social and demographic trends. He is economic analyst, North American representative and Principal for the US Consumer Demand Index, a monthly survey of American households’ buying intentions.

Flickr photo by Brendan Murphy, The last sunset on earth, taken "somewhere close to the ends of the earth - White Cliffs in NSW".