The US Economy – Miracle or Mirage?

By September 4, 2018Economics

The economy of a country is a key talking point of most politicians, and rightly so. If you preside over a strong and growing economy, your political reign is reflected in a positive light.  If the economy of a country is weak as you enter, it will often be deflected and blamed on the predecessors faulty policies. However, there are times when the economy is struggling and the incumbents in power, making changes to improve it, will often point out the most impressive aspects, and mask over the weaknesses in order to convince the voter base that they are succeeding. 

My uncle had a saying, “When your neighbour is out of work, it is a recession; when you are out of work, it is a depression.” Your current personal economic situation will influence how you perceive the strength of the greater economy and what people are saying about it. If you are working in an affluent environment you may not perceive anything is wrong. You have money to go out to dinner, go on vacation or buy that new car you have had your eye on. In other words, your confidence in the greater economy will dictate your spending patterns. There is the counter situation, where you have no work and have essentially stopped looking, yet the financial media and politicians in power are telling you how strong the economy is. If they believe it, it may motivate people to go back to school and adapt their skills to the current job market. If they don’t believe it, they may weather the storm and pull back their spending (Nordstroms is off the table for now, time to head to Walmart). If enough people don’t believe it the true economy will eventually show its true colours no matter what the media and politicians say. 

So what is the true story? There are many economic indicators that are used to track the health of the economy. We looked at these indicators to see if they do provide some kind of clarity or, like many things, it is basically our perception of the current economic state that makes it strong or weak. 

Gross National Income (GNI) and Gross Domestic Product (GDP) are often used to judge the growth of the economy. For most nations there tends to be little difference between GDP and GNI, since the difference between income received by the country versus payments made to the rest of the world tends not to be significant. For example, according to the World Bank,  the U.S.’s GNI was only about 1.5% higher than its GDP in 2016. 

The graph below shows the Real GDP growth rate of the United States from 1990 to 2017 (GDP being the market value of all final goods and services produced within a country in a given period). The Real GDP growth is adjusted for price changes, as inflation or deflation and is chained to the U.S. dollar value of 2009. The Real GDP increased by 2.3 percent in 2017.

The Hutch Report

It takes capital to fund growth and countries will increase their debt loads to increase that growth but if the growth doesn’t come they find themselves in the difficult situation of struggling to pay back the debts. The debt-to-GDP ratio is the ratio of a country’s public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio indicates its ability to pay back its debts. The US recorded a government debt equivalent to 105.40 percent of the country’s Gross Domestic Product in 2017. Government Debt to GDP in the US averaged 61.70 percent from 1940 until 2017, reaching an all time high of 118.90 percent in 1946 (funding for World War II had something to do with that) and a record low of 31.70 percent in 1981. At the moment, it doesn’t appear to be moving in the right direction.

It should be pointed out that the GDP is made up of Personal consumption + Investments + Government expenditure + Net Exports. Consumption makes up 70% of this GDP number. As mentioned above, if the consumer is in a good mood and confident about the future they will go out and spend. Many will even use credit to charge those purchases and pay another day. However, if they get worried they will pull back their spending and start saving. So in a sense, “So goes the consumer, so goes the economy.” 

The personal saving rate is calculated as the ratio of personal saving to disposable personal income and refers to these strategies of accumulating capital for future use by either not spending a part of one’s income or cutting down on certain costs. In 2017 it amounted to 2.4 percent, as opposed to 10.4 percent in 1960. This was equivalent to just over 384 billion U.S. dollars in the fourth quarter of 2017. In June 2018, the personal saving rate in the US suddenly spiked and amounted to 6.8 percent.

The Hutch Report

It is also worth looking at the household debt to income levels of the consumer to know if they are tapped out or not. Households debt in the US increased to 78.70 percent of GDP in the fourth quarter of 2017 from 78.50 percent of GDP in the third quarter of 2017. The households debt To GDP in the US averaged 57.79 percent of GDP from 1952 until 2017, reaching an all time high of 98 percent of GDP in the first quarter of 2008 and a record low of 23.80 percent of GDP in the first quarter of 1952. The consumer, not surprisingly deleveraged after the 2008 financial crisis, however on a historical level they are still indebted well above the average. 

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We won’t even bother looking at retail, as many in the financial media do, to determine the health of the consumer. An increase in Target’s earnings or any other retailer could have a myriad of reasons behind better numbers. Better revenues could be the result of taking advantage of the demise of other retailers (JC Penny or Sears for example). It could be more astute marketing or just better managed. Equally, increased earnings could come from stock buy backs, one off charges or any number of other accounting engineering tricks. 

A much better indicator reflecting the potential health of the consumer are the employment levels. These figures, particularly the unemployment rate, tells us the percentage of the labor force that is unemployed. Since unemployment insurance records relate only to people who have applied for such benefits, and since it is impractical to count every unemployed person each month, the government conducts a monthly survey called the Current Population Survey (CPS) to measure the extent of unemployment in the country. The CPS has been conducted in the United States every month since 1940. In 1994, the CPS underwent a major redesign in order to computerize the interview process as well as to obtain more comprehensive and relevant information. There are about 60,000 eligible households in the sample for this survey. This translates into approximately 110,000 individuals each month, a large sample compared to public opinion surveys, which usually cover fewer than 2,000 people. However, they are essentially polls and we have seen in the recent past how accurate polls can be. 

The chart shows a clear decline in unemployment, yet does it really tell the true story? As campaign Trump said (video below), “Don’t believe those phony numbers.”

That was an impressive speech by candidate Trump. So what do the UI numbers tell us. We took a look at the numbers from the NFP back in June (video below).

The current UI numbers are indicating a very tight labour market. Companies just can’t find the workers. However, normally when that happens a company is forced to become more competitive with other employers and increase wages in order to attract the workers they need. Yet, that doesn’t look to be happening as we see from the chart that wage growth has been pretty stagnant. 

Currently there are roughly 96 million Americans no longer in the workforce. How has that affected the poverty levels? The official poverty rate is 12.7 percent, based on the U.S. Census Bureau’s 2016 estimates. That year, an estimated 43.1 million Americans lived in poverty according to the official measure. According to supplemental poverty measure, the poverty rate was 14.0 percent. This should be considered high considering that it exists in the most affluent country in the world. 

The Hutch ReportPoverty rate in the US as a % of population – US Census Bureau

At the moment, it is not worth looking into the country’s import/export situation considering that President Trump has pulled the country into a trade war. Nobody knows how this will turn out and what the repercussions will come from it.

So in summary the charts show that US GDP growth is relatively stable, US government debt is increasing, US households savings are trending up and household debt is decreasing albeit it is still high, there is low unemployment but no wage growth and poverty is increasing. Some of the signs are a bit paradoxical such as the low wage growth which could be a partial reason why the poverty levels are increasing and consumer spending is decreasing.

So we have looked at some of the principle indicators that should provide some insight into the true health of the economy. You can take it how you see it but regardless, you have to admit that the picture is not crystal clear. Despite that, the financial media’s use of exaggerated claims such as, “Strong,” “Booming,” or “Firing on all cylinders,” gives the indication that we have entered a new era. President Trump seems to have changed his stance on the figures, touting and taking credit for the unemployment numbers that he criticized as candidate Trump. He also recently said, the US is “setting records on virtually every front” and is “probably the best our country has ever done.”

In the end, if the general public truly believe these claims, experience it in their neighbourhoods and families, they will have the confidence to go out and spend. Greater consumption patterns will improve the health of companies and they will hire. You would expect wage growth thereby lifting the standard of living across the nation. If the public does not believe the hyperbole, they will pull in their spending and try to reduce their personal debt levels. They will protect themselves.

In the end perception wins out. You be the judge.