By Madeline Schnapp, Director, Macroeconomic Research
If the U.S. economy operated in a vacuum and there were unlimited demand for low-yielding U.S. Treasuries needed to fund annual budget deficits exceeding $1 trillion, we would expect the economy to keep growing at a slow pace. While high unemployment, consumer deleveraging, and a crippled housing market are major headwinds to growth, there are pockets of strength in several sectors: information technology, health care, natural resource exploration and mining, and temporary employment. Various economic data points to continuing slow growth (data as of 11/8/2011):
- Our withholding tax based employment model indicates the economy added 160,000 jobs in October, more than double the 64,000 jobs added in September. The estimate of an 80,000 job gain by the Bureau of Labor Statistics was too low and probably will be revised higher (the BLS revised its August and September employment estimates up 154%).
- Wage and salary growth net of inflation was +0.6% y-o-y in October, up from -0.2% y-o-y in September.
- The TrimTabs Online Job Postings Index rose 1.9% in October following a 2.6% gain in September. The index retreated 0.9% in the past four weeks, however, suggesting job demand has slowed recently.
- The four-week moving average of initial unemployment insurance claims fell significantly in September and October, pointing to an improving labor market.
- Commercial banks are beginning to lend more to small and medium-sized businesses. Since mid-July, commercial and industrial (C&I) loan balances have increased $54.8 billion, or 13.1% annualized, the fastest growth since March 2008. Meanwhile, commercial bank cash balances have declined $84.4 billion, or 14.4% annualized.
- The Institute for Supply Management Manufacturing and Non-Manufacturing general business condition indices remain positive, although the manufacturing index has been barely in expansion territory for four consecutive months.
Obviously the economy does not operate in a vacuum. It is dependent on the outcome of the Eurozone sovereign debt crisis and the generosity of foreigners to fund massive budget deficits. The economy is now highly vulnerable to shocks.
“PIIGS ‘R’ US”: Eurozone Sovereign Debt Crisis Shifts Attention from Spiraling Costs of US Social Benefit Programs.
Last March, we introduced the TrimTabs Dependency Ratio, which compares government social benefit payments—including Social Security, Medicare, Medicaid, and unemployment insurance—to wages and salaries. We created this ratio to show how income from social benefits grew much faster than wages and salaries in the past fifty years. The ratio hit 34% in September, 2011 up from 22% in 2000 and 26% in 2007.
Social Security and Medicare are the biggest contributors to the rise in the TrimTabs Dependency Ratio. Benefit payouts for both programs far exceed payroll taxes—and supplementary insurance payments in the case of Medicare—leaving the balance to be filled by borrowing. In 2010, the imbalances totaled $50 billion for Social Security and $293 billion for Medicare. In the past ten years, Medicare payouts grew an average of 12.6%, while wages and salaries grew an average of 3.6%.
While investors are fixated on the Eurozone sovereign debt crisis, spectacular growth in social benefits leaves the U.S. vulnerable to a similar fate. We believe the imbalances warrant the moniker “PIIGS ‘R’ US.” The U.S. has yet to reach the debt wall that Greece, Ireland, Italy, Portugal, and Spain have hit, but the U.S. would do well to heed the lessons from these nations about the consequences of out-of-control government borrowing.