In a poll taken earlier this year, 32% of the respondents stated that the stock market "has gone down since Obama became president." That is, of course, spectacularly wrong. "The stock market," whether gauged by the Dow Jones Industrial Average (^DJI), S&P 500 (^GSPC) or the Dow Jones total US stock market index (^DWCF), has gone up by almost 200% since Obama took office. Predictably, holding this objectively false opinion is affected by ideology, given the linkage to a Democratic president - 59% of the poll respondents who identified as "very conservative" believed the falsehood that the market had gone down; more who identified as "somewhat conservative" got it wrong than got it right. The percentage of respondents holding the false belief declined as they reported more liberal leanings, but was always >0.
Now, most people aren't investing in the stock market, so they might not know the specific numbers involved. Still, when one considers that the value of the market as a whole reflects investors' assessment of the collective value of America's businesses, the fact that so many people have an entirely false belief as to which direction that is headed over eight years is remarkable.
I don't believe that these people are stupid. I think they've been conned. The sources of information they rely on have led them to hold that belief, and they have never checked any other sources to get a more realistic picture of the world. If they were aware of basic, primary source data on this question - and bothered to check them - they would know the right answer. I believe that they have absorbed false information and made erroneous assumptions based on what "everyone knows."
While I would expect that people who read articles on Seeking Alpha would be knowledgeable enough about the stock market to know which direction it has been heading since 2009, we all are making investment decisions based on general assumptions about the economy: what is "normal" for it, how it has reacted to different events, global and domestic, and how different governmental policies have affected it in the past. While a large part of the investor's decision-making process is based on investment-specific criteria - P/E ratios, dividend coverage ratios, "moats," etc. many investment decisions are affected by assessment of overall economic trends, in the U.S. and internationally: Is GDP growing at a pace that is faster or slower than in past periods? How many people are unemployed? Are we headed for a recession? Is inflation going to erupt in the near future? How will changing demographics affect future economic growth? Will the national debt stifle future economic growth? This excellent article by Jesse Moore is a good example of this type of macroeconomic analysis which the savvy investor should not ignore.
There are numerous sources of "investment specific" information to help you compare investment A to investment B on an "apples-to-apples" basis - Seeking Alpha, Morningstar, Yahoo Financial, the various broker's websites, and innumerable newsletters and blogs. But information about more general economic data is often circulated on an ad hoc basis by folks with an agenda, who choose what data to highlight and how to frame it to advance their cause, whatever it might be. Someone touting an investment in gold will paint a very different picture of the economy and what it portends for the near future than someone seeking to sell you an interest in an energy MLP or a tech stock. People with a political axe to grind will also cherry-pick data which makes "my side" look good and "the other guys" look like failures. If you credulously accept the picture painted by these folks you are likely to reach an opinion about those macroeconomic conditions which will push your decision in a direction that a more balanced viewpoint would not have taken you.
So what's an investor to do? Well, there are sources of reliable primary data that are available online to check those claims for yourself. The purpose of this article is to provide a road map to some of those databases and show how you can decide for yourself what the real picture of the economy is and was at different times in the past, and make your own decision about what that portends for the future. In the course of doing so I'll try to differentiate between analysis which is "in my opinion" and the base data, so you can decide for yourself what statistics to believe and/or rely upon in making your investment decisions and what the data signifies.
Gross Domestic Product (OTC:GDP)
The most basic gauge of overall activity in the economy is the GDP. A two-quarter decline in GDP signifies a recession. We expect GDP to grow over time, and most folks think the more growth in GDP the better. In fact, high growth in GDP has tended to be followed by a period of low, or even negative growth - a reversion to the mean. There are lots of disagreement about what is best for GDP growth, but step 1 is seeing what GDP has been like in the past 50 years or so, to get a feel for what "the mean" is that we're likely to see a reversion to.
The federal Office of Management and Budget (OMB) keeps a historical record of federal budgets since the 18th century, with a calculation of GDP for the past 80 years. You can download those excel spreadsheets here: OMB historical (Note: this data is maintained on a fiscal year (FY) basis, from October 1 to September 30, and adjusted to the value of the dollar in 2009) Plugging that data into powerpoint (deleting the odd quarter reported separately in 1977) produces this graph:
The Federal Reserve keeps tabs on GDP as well, on a quarterly basis - Fed GDP. The FRED graph is consistent with the OMB data, just more detailed:
So that's a picture of overall GDP over the past 50 years, adjusted for inflation. But what about population growth? That affects GDP as well. If GDP doubles but the population triples, we haven't really seen an improvement, have we? The World Bank keeps statistics of "per capita" GDP for the US as well as internationally: World Bank per capita GDP. Here's the World Bank per capita GDP growth chart:
But what about the growth of GDP? Federal Reserve has a chart for that: Fred GDP Growth.
What is revealed through the rolling average and the trend line is significant. I draw the same conclusion that Jesse Moore did: the presumptive multi-year average growth of GDP - the "mean" to which we should expect reversion - has been steadily declining over the past 50+ years and is no longer ~4%, but closer to 2% and long-term investment decisions are prudently made with that assumption.
Demographics and employment data. Predicting the future of the economy in general as well as assessing specific investment requires having a handle on changes in the demographic composition of the country and on employment statistics. The Census Bureau has a massive amount of data, current as well as historic, at Census Bureau. One example: a comparison of the age and sex distribution of the country in 2000 vs. 2010, found here:
The demographic "bulge" of the baby boomers is clear; what is really striking is the way it teetered over retirement age - six year ago. And note the decrease in people aged 30-45 - prime working years - in the 2010 census. That will be reversing itself over the coming decade as the millennial bulge (15-30 in 2010) works its way through. The stereotype of millennials as pampered slackers is no more accurate than prior generations' similar denigration of every following generation. They will be the new parents, workers and managers of the coming years - and there's a lot of them. In my opinion, that portends a modest increase in economic activity, as that bulge ages into maturity, offsetting the departure of the boomers from the job market.
Speaking of jobs: Employment numbers are much more controversial. Articles such as this one insist that officially generated unemployment numbers are "politicized guesswork." In my opinion, employment and unemployment statistics, which have been generated over many years using the same criteria every year they are calculated, are a valuable and reliable means for comparing today's economy with the economy 10, 20, 30 or more years ago. And there are several statistical measures of employment maintained by different agencies, which approach the question of how the job market looks to workers in different ways. The statistic which is most frequently cited is the Bureau of Labor Standards (BLS) "U-3" which is defined as people over the age of 16 who are actively seeking work but have no job. BLS publishes a historical chart for that number here which looks like this:
The U-3 number is often criticized for not including discouraged workers, and people who are working less than full time involuntarily. But BLS also keeps track of the larger number which includes those groups. That is called "U-6." The U-6 chart is here and looks like this:
(You can see a 12-month chart with the definitions of the various different groups tracked by BLS here.)
Of course, the other way to assess the job market is through the percentage of the population which are employed: the "labor force participation rate." The most often quoted statistic kept in this series is the percentage of the country's population which are 16 years old or older and have jobs. That is tracked by BLS (Ten-year chart) The Federal Reserve has a chart of this statistic since 1948:
The "16+" statistics have been criticized for including too much - lack of a job at the lower end may signify more young people able to go to college, and at the upper end by more people who have lived longer after retirement. The statistic which avoids most of those issues is the labor force participation rate for ages 25-54 which counts the percentage of people in their prime working years who are employed. Again, BLS has a ten-year chart and the Fed chart goes back to 1948 which looks like this:
My takeaway is that the most informative data comes from that last chart - and what it indicates is a steep increase in workers from 1970 to 1990, (a period which saw increased participation by women in the job market) a flat period for the next decade, and a gradual decline in employment participation starting around 1998. The bubble followed by recession in 2006-2010 tends to mask the overall trend, but is, in my opinion, "noise" rather than "signal." (The scale of the charts can be somewhat misleading as well; note that even the 16+ chart only shows a decline from 67% to 63%, even though the truncation of the Y axis makes the drop look extreme.)
In my opinion, the driver of the trend is demographics rather than any economic or political policies. And that means it is likely to continue with the entry of the millennials into the job market flattening the curve at close to current levels.
Government spending, taxes, deficits and debt.
Frequently cited (and frequently misrepresented) are historical data regarding government spending, taxation, annual deficits and the accumulated national debt. OMB maintains records of the first three at OMB historical. Here the meaningful numbers are those which set forth the revenue, spending and resultant deficit as a percentage of GDP (table 1.2). Plugging that data into powerpoint yields this chart:
The Federal Reserve has a chart showing the resulting deficits over the years here: deficit chart which shows this since 1960:
The OMB historical records also have a detailed breakdown of the accumulated national debt, including federal debt held by government agencies (primarily the Social Security trust fund) and by the public. (See Table 7.1) Those numbers since 1960 produce this chart:
Often an argument will be made that one or the other political party being in power is responsible for some economic development - good or bad. I've noticed that a certain sleight of hand is often employed to bolster these arguments. Elections are held in November of even-numbered years, but the people who are elected don't take office until the following January. And most of the statistics discussed above are handled on a fiscal year basis - from October 1 to September 30. So, for example, GW Bush and the members of the 107th Congress were elected in 2000, but didn't take office until January 2001. And FY 2001 actually started in October 2000 and extended to September 2001, under tax and spending laws enacted in 2000. So in reality to the extent that the performance of the economy in FY 2001 was affected by the actions of the government, GW Bush and the 107th Congress had very little to do with it. FY 2002 was actually the first fiscal year affected in any meaningful way by the decisions made by those politicians. So if you want to make an analysis based on which politician is responsible for what, start with the FY that is two years after the year in which he or she was elected. (See discussion here.) A chart of presidential terms vis-a-vis fiscal years looks like this:
So, in my opinion, don't blame (or credit) Trump for whatever happens to the overall US economy until next October (at the earliest.) Short term events - such as some market sectors increasing in anticipation of new policies - may take place. But macroeconomic trends don't turn that fast.
Conclusion: demographics are destiny; economic policy is deck chairs.
Reviewing the primary source data leads to the conclusion that macroeconomic trends in the country are driven by demographics - primarily the size of different age groups - more than anything else. While endless debate rages over taxes and the national debt, what really drives the economy is whether there are more or less 30-year olds relative to the number of 60-year olds, etc. The increase in the number of women into the labor market starting in the 1970s was far more significant to the economy overall than Reagan's tax cuts (or the resultant deficit spending - and you can argue amongst yourselves as to which of those factors were more significant.)
We have gone from 4% annual growth to 2%. That's not recent; it's been a gradual development over decades, and it's here to stay for the foreseeable future. As the boomer bulge ages we'll see decreased employment participation until the millennial bulge takes over, which should stem the decline and flatten the curve at current levels. Again - this is not a recent phenomenon.
In my opinion, this is the "new normal" - the mean to which we should expect reversion. Trump can't "Make America Great Again" if, by "Great" you mean "America in 1960." The demographics aren't there. There're too many boomers and they're too old. If the economy is caused to spurt ahead at a 4% rate one year (due to tax cuts and capital repatriation, perhaps) it will stall until the mean has been reverted to - at cumulative 2% annual growth.
But don't trust me - run the numbers for yourself.
"Everyone is entitled to his own opinion, but not his own facts." Reasonable people can disagree about what the past has taught us about the economy and what current developments signify for the future. But basing one's opinions on inaccurate, skewed, or misinterpreted data creates a high probability that one's predictions about the future will be wrong. There are folks who will insist that any statistics which don't agree with their view of the world are "fixed" or "political." But the historical data referred to in this article has been collected and analyzed using the same techniques, reviewed, revised and improved continually over time to improve their accuracy and reliability, through years when both political parties have held sway. In my opinion, that information is highly accurate and reliable - more so that what some guy on the internet tells me "everyone knows."
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.