Historically, when unemployment is running at 4.9% and job growth continues to confound on the upside, one would expect an economy that is growing at least at a 3%-plus rate. Instead, Gross Domestic Product, which measures all the goods and services in the economy, is now tracking at a 1% rate for the year so far. If you measure growth since the 2008 financial crisis, we have barely topped a 2.1% annual gain in eight years.
Then there are earnings. American corporations are now experiencing their sixth straight quarter of declining profits. And even those profits appear to be engineered. For example, since 2011, corporate sales have been up 25%, while operating earnings are up a lot more (190%). That should be statistically impossible, if it were not for financial engineering.
The answer is simple. Corporations have been buying back their stock, rather than investing in the economy, all this time. When you do that, you have less stock and the appearance of better earnings per share, despite the fact that you have the same or lesser amount of earnings. But who am I to spoil the party?
The fact remains that in July the country gained 255,000 new jobs versus expectations of 180,000 gains. This follows on the heels of a 202,000 gain in jobs last month. The unemployment rate remained at 4.9%, but wage growth moved higher, leaving the overall gain so far this year at about 2.5%.
Now all we need is for the economy to catch up to all this good news. But it has remained stubbornly snail-like in growth. Economists say that two factors are responsible: changing demographics (too many Baby Boomers retiring) and a decline in productivity (topping out of the internet boom that boosted the cycle).
My own belief is that what has been (and still is) missing in our economy is corporate investment in our economy. Why that has failed to materialize is a mystery. Some say business no longer trusts our political leaders. Others say business leaders are not willing to risk investment because taxes and regulation make capital investments uneconomical.
Whatever the reason, it is not happening. The private sector has failed us thus far, so that leaves the government to take up the slack. Something similar happened in the late thirties and only a massive effort by our government to spend our way out of sub-par growth did the trick.
Our central bankers have been arguing for years that fiscal spending was necessary to return the economy to historical growth rates but Washington isn’t listening. Why should they take the risk of runaway budgets, mounting deficits and voter discomfort when the Fed has been doing their heavy lifting for them over the past eight years?
Will any of this change under a new president and congress? Is anyone who is running for office even acknowledging that we have an issue here? Not that I can see. In the meantime, the world’s central banks continue to accommodate, continue to plug each hole in the dike with more money. And as interest rates decline lower and lower, only the stock markets offer any kind of return.
As such, investors should remain in the stock market until central bank policies change. As markets trend higher, (I expect the S&P 500 Index to break 2,200 in the weeks to come), one should expect larger, sharper and even more painful pull backs. That is the price of admission in this, the only game in town.