Let me tell you why I’m still worried before detailing the positive economic data

Yesterday I promised you to “look at individual economic data points and tell you why I think they bolster the case for optimism about the economic trajectory.” But before I get into that, let me tell you why I still worry about the foundation of this global recovery. And a lot of it has to do with the pace of growth and with inequality. Let’s look at the US here.

Here’s the juxtaposition I want to present to you. First, there’s the fact that consumer confidence is at its highest level since the dotcom era. I mentioned that yesterday. Here’s the takeaway from Bloomberg:

Jumps in the Conference Board’s measures of the present situation and expectations signal Americans are becoming more upbeat about the economy and employment as the labor market improves and stock prices climb to records. Improvement in household confidence helps underpin their spending, the biggest part of the economy.

The results are consistent with other reports that showed economic activity and confidence are bouncing back, in part a sign that the hit from the recent hurricanes is dissipating. The University of Michigan’s consumer sentiment index climbed in October to the strongest since the start of 2004, while the Bloomberg Consumer Comfort Index is near the highest level of the expansion.

The share of respondents who say jobs are plentiful rose to 36.3 percent, the most since June 2001, while people reporting good business conditions increased to 34.5 percent, matching the highest since 2001.

The unmistakeable takeaway here is that it’s not just the economy overall that’s doing well but the job picture is also doing pretty well too. And this economic growth and job growth is the underpinning of consumption growth. It’s all a virtuous circle right now.

But then, how does one explain this factoid?:

And here’s how Bloomberg explains the survey data – in seemingly contradictory terms to the consumer confidence data:

For those lying awake at night worried about health care, the economy, and an overall feeling of divide between you and your neighbors, there’s at least one source of comfort: Your neighbors might very well be lying awake, too.

Almost two-thirds of Americans, or 63 percent, report being stressed about the future of the nation, according to the American Psychological Association’s Eleventh Stress in America survey, conducted in August and released on Wednesday. This worry about the fate of the union tops longstanding stressors such as money (62 percent) and work (61 percent) and also cuts across political proclivities. However, a significantly larger proportion of Democrats (73 percent) reported feeling stress than independents (59 percent) and Republicans (56 percent).

The “current social divisiveness” in America was reported by 59 percent of those surveyed as a cause of their own malaise. When the APA surveyed Americans a year ago, 52 percent said they were stressed by the presidential campaign. Since then, anxieties have only grown.

A majority of the more than 3,400 Americans polled, 59 percent, said “they consider this to to be the lowest point in our nation’s history that they can remember.” That sentiment spanned generations, including those that lived through World War II, the Vietnam War, and the terrorist attacks of Sept. 11.

I reconcile the two surveys by noting that an underlying sense of social and economic anxiety can co-exist with a sense that the economy is doing well and getting better. But still, these two surveys are very much in conflict.

I think the pace of recovery, inequality and the root causes of inequality further explain the contradiction. For example, Larry Summers and Olivier Blanchard issued a paper in October in support of Summers’ secular stagnation hypothesis that basically says the present recovery is worse than the Great Depression. While they concentrate on how to fix the problem by rethinking our approach to policies we use to stabilize the economy, I want to concentrate on this tepid recovery as the root cause of socioeconomic anxiety and political polarization.

Moving beyond the US for a second here, let me ask you this: why is the Alternative für Deutschland – what one family member of mine who voted for the right of centre CDU party called “Nazis in our parliament” – in Germany’s parliament at all if growth there is gangbusters? Aren’t we constantly being told that Germany is the model for the rest of the euro zone? So then why is a party with a name like “Alternative for Germany” gaining support throughout the country? Don’t tell me its immigration and xenophobia because it’s not that simple.

Germany’s economy grew by 22% between 1991 and 2014, helping to fuel income growth of 12%.

But the benefits have not been shared equally.

The richest 10% of households saw their real incomes jump by 27% between 1991 and 2014, according to the German Institute for Economic Research. Middle class incomes increased by 9% over the same period, while households at the bottom saw their incomes drop by 8%.

Wages paid to workers increased by 5% between 2000 and 2016. Meanwhile, income from investments and business activities jumped by 30%.

This is the same phenomenon we are witnessing in the United States and in other developed economies too.

One chart says it all, frankly.

US Productivity  Pay Gap

Source: Economic Policy Institute

Until 1973, wages went up in lockstep with productivity. After 1973, hourly compensation basically flatlined – and actually turned down in real terms for men – while productivity soared. Almost all of the gains of economic growth went to the owners of capital. That’s a problem.

So Joe and Josephine Worker were making the economy more and more productive. Yet they weren’t getting paid more for it. Sometimes they were getting less.

Did you know, for example, that almost all the US jobs created since 2005 are temporary? I am not talking about temping per se; I’m talking about contract work, and the gig economy. What people call the “alternative work category”. Those are jobs that provide less stability. Thinking about the US recovery as a ‘contract work’ recovery changes the tenor of it then.

Here’s the picture I’m painting: Before 1973, ordinary workers gained economically as the economy powered ahead. However, since 1973, workers have not shared in America’s economic prosperity (- and they have filled the gap with debt as interest rates headed toward zero). The same is true in other advanced democracies. When the Great Financial Crisis hit, it exposed many to unexpected deprivation made significantly worse by huge levels of household indebtedness. And while we have had an economic recovery since then, it has been tepid. In Europe, for many countries, it’s only really beginning right now. But the same pattern of ‘winner take all’ has resumed, as the OECD discovered a year ago when analyzing global data:

“The fruits of the economic recovery have not been evenly shared,” the OECD said Thursday.

The group found that the bottom 10% of earners in developed countries saw their real incomes fall by 16.2% between 2007 and 2010. The incomes of the top 10% fell by only 4.6% over the same period.

The recovery has also produced unequal results. Between 2010 and 2014, the incomes of the bottom 10% have risen by only 1.6% compared to the 5.2% growth rate enjoyed by the highest earners.

The end result is more income inequality. The wages earned by the top 10% had recovered to pre-crisis levels by 2014, while the same year the poorest earned 14% less than they did before the crisis.

So, what happens when even this tepid recovery ends? What will the politics look like? Will the populists rise again? What kinds of populists will rise to power though — and what are the military and economic strategies they will use to achieve their aims?

These are my worries.

I see economic growth throughout the developed and developing world. And I see a global economy whose growth is accelerating. But underneath that fine veneer, I see deep, deep fissures in the foundations of that growth. And if those cracks aren’t fixed, I believe we will be headed yet again toward crisis – and this one will be more political and military in nature than the last one.

Happy Wednesday! :)

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.