Lacking the Multiplier EffectJuly 31, 2014
We a living in a distinctly bi-modal world, and it is limiting the ability of the US economy to accelerate. While those near the top of the economic ladder are doing well, the vast majority are still seeing little forward progress. The post-Lehman stimulus gave the whole economy a jump start, and initially a rising tide raised all boats. However, as fiscal stimulus was replaced with quantitative easing, the lion’s share of the benefits accrued to those who had assets or the wherewithal to accumulate them. The top end has seen strong asset appreciation in stocks, bonds and real estate. Unemployment rates for skilled workers are already low, with rising wages signaling tight labor markets. Meanwhile, despite decent job growth, labor’s share of income has shrunken to just half of GDP. The median family’s income has not risen in real terms. Faced with unavoidable increases in health care, food and energy, these households have cut back where they can, generating deflation for those at the bottom of the economy, even as relative prices rise for those at the top.
Like a car that is not hitting on all cylinders, it is possible to maintain a steady speed on the highway once up to speed. However, when you tromp on the gas, you gain no acceleration. You don’t slow; you just are disappointed in the failure to pick up speed. However, repeated efforts to spur the engine are not without cost, as the available fuel will be wasted away and ultimately the car will slow. Corporations are now in the phase of the cycle where they are narrowing profit margins as they hire faster than they gain revenues. But if their new employees save the new wages – either paying down debt or adding to assets in anticipation of future expenses – the gas will go to waste. Given many households are still underwater on mortgages, or strapped by student loans, or facing credit card and payday loan interest rates that are well in excess of their income growth, spending more is not the first response of many newly employed workers. Unlike typical post-war cycles where new jobs meant new credit purchases – creating a job for someone else – the multiplier effect appears lacking today.
The preceding is an abridged version of a commentary for McVean Trading and Investments, LLC and has been reposted here with permission of the author.
The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.