Household Struggles Trump Macroeconomic Indicators

The recent jobs report brought with it new fears of recession as the economy has lost jobs for the second straight month.

If the chart above is any indication, the declining jobs market is just another piece of evidence that if we’re not already in a recession we’ll be in a recession very soon.

Personally, I think that economists should stop looking at Macroeconomic data and consider the situation at the household level: price increases for healthcare, food and energy are outpacing wage increases. Furthermore, there is ample evidence that consumers continue to use/abuse debt (and even their 401ks) to meet their basic household expenses. If the fact that middle-class households are struggling to fund their household expenses doesn’t spell recession, than I don’t know what does.

In other words, recessionary indicators focus too much on the big picture and/or are just measures of a large number of people “losing” in the current economy. While these data points are valuable, there should (arguably) be more focus on middle class people who aren’t necessarily losing, but aren’t winning either. I think the U.S. economy lives and dies by the middle class, and if the middle class is struggling than we’re in a recessionary environment no matter what the macroeconomic indicators say.

Final piece of food for thought: if GDP growth is measured vs. the Fed’s nonsensical “Inflation Ex-Inflation” number, than aren’t we in a recession anyway since the real inflation faced by consumers and businesses easily outpaces GDP growth over the past 12 months if not longer?

Sources: Graphic courtesy of the Wall St. Journal

Comments

[Tony Soprano]

Good sfuff, however, your views supports the position of the Dems. The Dems now consider the economy a more important issue than the Iraq war. I agree with Warren Buffet. The middle class needs a better tax break than the rich.

[Malkiel]

I'm in a position in life to understand the economy better now than in my youth, and the lesson I'm taking away from this one so far is that the keepers of the economy--government entities like the Fed and Treasury, and the big Wall Street banks or funds--are content to rely on trailing indicators to decide how the economy is trending, and are thus unable to tell us where we're headed until we already know we're there. I knew we were in economic trouble in September because I was caught up as a consumer in the house buying/selling horror and could see how it was gripping the imagination of everyone at street level around me. I could also see evidence of small businesses paring back purchasing and hiring, or stocking less goods, as a prudent measure. And of course we've all been abusing credit for so long that we must have seemed bulletproof to the pro's, but at ground level we all knew that refinancing mortgages kept the credit card balloon from blowing up in our faces.

So in line with Lee's thinking I suggest the pro's need some better ground-level indicators if they hope to be proactive before the next recession. Ground-level indicators will also help us know when we can invest again to dig out of the present downturn...

[DGRO]

The middle class needs better paying jobs, not Refi's and HELOC's to feel wealthy. Otherwise the consumer base will keep on dwindling towards WalMart. I pray that all the idiots living beyond their means to match the Joneses or whatever, get a wake-up call and don't sink this nation.

[Kunst]

Malkiel: Good comment. Being a small business owner, I ask every one of those I encounter how business is. Going on 6 months ago, the standard answer turned from "OK" to "slow". It's not getting better.

Unfortunately, the US is on the losing side of some major trends, and the result is not going to be happy. We have been living high on the hog -- life is one big party -- for decades. But it's become harder and harder to maintain the lifestyle, hence the massive increase in debt, as people try to "temporarily"... cover a slight shortage of income compared to expenses.

What people don't realize is that the American dream has been built on advantages that can't last, and we must more or less revert to the mean. A European poster on another discussion mentioned that Americans use 26 barrels of oil per person per year while the European equivalent is 12. How can that work?

Big macro theme/problem: America has lived much better than the rest of the world for a long time, based on huge advantages in place at the end of World War II. That was 60 years ago. An American worker could have a middle-class life with a high school education, while the equivalent person in Europe was skimping by, and in Asia, he/she was working for 1/10th the money.

That worked as long as barriers to entry protected us. Capital investment, transportation costs, communication limitations made a moat around America's island of privilege. Unfortunately, we came to think that this was the natural order of things forever, the Americans would always have more than equivalent foreigners. Not so any more. Now our economy is increasingly uncompetitive with better educated nations. In the mean time, we have spent much of the inheritance, the competitive advantage and the accumulated economic strength. All those nice foreigners who worked so hard for our American dollars have built up their economies to the point that most of the American advantage is gone.

We are still living in the past. We try to work harder to make up for the structural problems. That doesn't work by itself. We don't see the world accurately; we are in denial, which never changes reality.

We need to change our view, lose our sense of entitlement, realize that we are losing the economic competition. The two main issues: debt (consumption) and education. Like it or not, the American standard of living is coming down. People are going to have to cut back spending. If we want to stay competitive -- and we do have many strengths -- we need to realize that education is the key. Other countries figured that out decades ago, and have quietly snuck past us while we were sleeping. There is no easy solution to this situation, but there are difficult solutions. America does best in difficult times.