“Every man is a consumer, and ought to be a producer,” remarked 19th-century philosopher Ralph Waldo Emerson. “He is, by nature, costly and needs to be affluent.”
In today’s world, Emerson’s insightful observation appears to be turned upside down. As we navigate through 2015, both producers and consumers find themselves entrapped in a tightening vice. Spiraling debts and stagnating wages are making life increasingly difficult for ordinary workers.
Indeed, had Emerson been able to witness seven consecutive years of a zero interest rate policy that gradually crippled the economic and financial system, he would have been appalled by the resulting chaos. The disparity between the stock market and the overall economy has likely never been more pronounced.
Emerson’s era was characterized by sound money free from the interference of central bankers. The idea of printing money to purchase bonds and stocks would have been viewed as fraudulent. Today, however, such practices are regarded as sophisticated central banking strategy aimed at managing inflation, aggregate demand, and unemployment.
Unfavorable Economic Readings
According to a report by Reuters, “The Employment Cost Index, the broadest measure of labor costs, rose by only 0.2 percent in the second quarter, marking the lowest increase since this data series began in the second quarter of 1982, and following a 0.7 percent rise in the first quarter.”
This situation clearly indicates that workers are trapped in an employer-driven market. Despite their hard work, employees are experiencing the most minimal growth in compensation on record, as assessed by the Bureau of Labor Statistics over the past 33 years.
It’s evident that consumers are feeling the strain, and the data backs this up. “Michigan’s index of consumer sentiment dropped to 93.1 in July from 96.1 in the previous month,” reported U.S. News & World Report. Richard Curtin, chief economist for the survey, attributed the decline to the “disappointing pace of economic growth.”
The disappointing growth rate Curtin refers to is the annualized 2.3 percent in gross domestic product (GDP) from April to June, as reported by the Commerce Department last Thursday. This report also revised the GDP for the first quarter down to 0.6.
Interpret it as you will: a GDP of 2.3 percent is certainly preferable to 0.6 percent. However, it hardly constitutes a robust economic boom capable of alleviating substantial debts or providing workers with additional income.
The Twisted Tale of Consumers and Producers
It’s essential to remember that the global economy is more interconnected than ever. Economic sluggishness in one part of the world inevitably reverberates elsewhere.
In line with this, factory growth in China stagnated in July. Reuters characterized this slowdown as “unexpected,” yet it seems to follow a clear cause-and-effect pattern.
With stagnant U.S. wages, lackluster GDP, and declining consumer sentiment, American consumers are less inclined to purchase the myriad of inexpensive goods manufactured in China. Thus, the downturn in Chinese factories should hardly come as a surprise.
To keep these factories operational, producing goods that are not essential, China is now looking for additional stimulus. ANZ economists Li-Gang Liu and Louis Lam emphasized that “the stall in factory growth warrants more concrete policy measures to stabilize the real economy,” suggesting that funds used to support the stock market could better serve the real economy by cutting interest rates and reducing banks’ reserve requirements.
Undoubtedly, both U.S. consumers and Chinese producers are grappling with significant challenges.
Sincerely,
MN Gordon
for Economic Prism
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