Wednesday, July 3, 2013

Our economic direction

As we head into the 4th, it is not a bad time to ask just where we are going, at least in economic terms.  I am sure the NSA has listened in on everyone's phone calls and knows where we are headed for the holidays.
Are we getting better?
There are some signs of it, but the strongest indicator of strength in our current consumer driven economy is per capita growth in real incomes.  It isn't happening in any sort of meaningful way.  From a discussion (U.S: Desperately Seeking Income) by Yves Smith (the quoted section is embedded) at Naked Capitalism:
Notwithstanding these significant signs of improvement, one is left with the feeling that this recovery remains weak and fragile, and hence susceptible to shocks - internal or external.
Annualised real activity growth has averaged a sub-par 2% throughout the recovery and, despite the job gains noted above, the employment-to-population ratio has barely moved off its lows – the discrepancy between this ratio and the unemployment rate being solely due to an ongoing decline in labour force participation rates. The level of payrolls remains 2½ million below the peak. Yes, there has been a degree of healing, but no, the patient is not yet fully cured.
So despite the noted improvement, there is a need for additional momentum. To spur this activity, better outcomes for real household income growth are a necessity; which will require a healthier labour market; which will require a willingness to employ and invest; which will require stronger household demand; which will require heightened consumer confidence; which will require further balance sheet cleansing and a rise in wealth; which will require growth in income. Income is absolutely endogenous, and the chain of logic becomes circular quite quickly. All boats have fallen together, and they must rise in the same fashion.
As Yves notes,  real average hourly wages are still 0.5% lower than their June 2009 level, with real weekly wages (inflation-adjusted take-home pay) having grown by only 1.3% over the past four years.   And that's if you buy into the adjustments in the inflation rate as it pertains to a typical household.  In an economy that isn't really doing much in the way of new idea expansionary spending, consumer discretionary spending is the name of the game.  And it can't do much if people are deleveraging, and, in real terms, making less money.


PioneerPreppy said...

This is assuming the official inflation rate which many (including myself) declare is bogus. The real inflation rate has brought actual income down while perceived growth has been almost exclusively government spending and therefore really isn't growth.

I still maintain we are in a slow slide down. They are bailing for all they are worth but slowly falling behind.

russell1200 said...

Pioneer: I agree. Given the stress the system is under, I am not sure you can have one official inflation rate. The system is so tortured, that money isn't really fungible, and supply and demand are going through major shifts so that some items are inflating, while others are deflating.