In recent times, an unsettling trend has emerged in our economy. Despite repeated assurances of a strong recovery, the reality seems to suggest otherwise. Rather than advancing, the economy appears to be retreating.
Two significant data points from last week support this concerning narrative. The first of these was the employment report for July…
Thus far in 2013, net job growth has averaged over 200,000 per month. Yet, when the Labor Department released its figures for July, they reported only 162,000 new jobs—a stark drop. Additionally, the new roles being created aren’t the ones that drive economic expansion; instead, they often lead to stagnation.
“What you’re witnessing now is a nationwide trend of low wage growth,” said Dan Alpert, managing partner at Westwood Capital. “We have effectively become a society of hamburger flippers, Wal-Mart employees, bar staff, cashiers, and others earning very little.”
At Economic Prism, we appreciate the hard work of those who show up each day for their jobs, whether at fast-food establishments or retail stores. However, it is deeply concerning that such low-wage positions are among the few opportunities available today.
Struggling to Stand Still
The second data point emerged mid-week, as the Bureau of Economic Analysis reported that the U.S. economy grew by a mere 1.7 percent in the second quarter. What’s going on?
This growth rate hardly reflects a thriving economy. It does little to alleviate the country’s debt issues or create plentiful opportunities for those striving to rise from the lower tiers of society.
Ultimately, what we face is a lack of genuine economic recovery following the Great Recession. Four years later, the economy struggles to maintain its position while debts pile up like bricks in a prison wall. The middle class finds itself increasingly cornered.
Nevertheless, St. Louis Fed President James Bullard remains optimistic about future economic improvements…
“I believe we are positioned for strong growth,” Bullard stated. “The corporate sector appears to be in good health, and there’s considerable potential within the U.S. economy.”
However, from where we stand, the only major growth is observable in the stock market. The S&P 500 has surpassed 1,700, reflecting nearly a 20 percent rise this year. Yet, this surge should not be mistaken for a positive development—unless one equates it with the spread of cancer.
Exercises in Futility
The economy may be stagnant, yet the stock market thrives. A technical analyst would argue that a divergence is occurring. At some point, a correction must take place.
Either the economy will catch up with the stock market, or the stock market will realign with economic realities. Given how far the stock market has outpaced economic growth, a correction seems inevitable—likely by mid-fall, just in time for Halloween.
Currently, the stock market’s inflated state is largely due to the Federal Reserve’s aggressive policy of injecting $85 billion each month. This injection has failed to enhance the economy but has significantly inflated the stock market bubble. Such actions create a distorted economic landscape and widen the gap between the economy and the stock market.
Last Wednesday, Federal Reserve Chairman Ben Bernanke reiterated his commitment to continue injecting $85 billion into the financial system until economic conditions improve. Sadly, if these measures haven’t worked thus far, they’re unlikely to do so in the future. Forcing this approach is fundamentally a futile exercise.
“Economic growth emerges from businesses investing in fruitful projects, funded by genuine savings,” explains Professor Michael S. Rozeff. “It necessitates capital accumulation, fostering an environment of saving in anticipation of returns. When central banks and governmental policies manipulate interest rates and asset values, they deter saving and increase the uncertainty surrounding future returns.”
“The government cannot stimulate economic growth when it resorts to borrowing from banks, central banks, or the public, thereby inflating the money supply or diverting savings from business endeavors.”
Yet, they persist, undaunted by the looming consequences of their misguided efforts.
In conclusion, the disparity between a flourishing stock market and a struggling economy raises serious concerns. The current policies appear to inflate risks while failing to address the underlying economic ailments. Unless a fundamental shift occurs, we may find ourselves grappling with the repercussions of these unwavering decisions.
Sincerely,
MN Gordon
for Economic Prism
