Economic deliverance…or deception?

Leo Tolstoy said the two most powerful warriors are patience and time. Ordinary Americans have demonstrated extraordinary patience since the financial crisis in 2008, absorbing extended hits to real wages and household incomes that have caused many to question the generational “bargain” that our kids will always do better than we did. If asked, middle- and working-class folks would say it’s about time the economic recovery (now 5 years young), delivers the goods, so to speak. Fortunately, the first 3 quarters of 2014 have provided evidence that this is beginning to happen.

The year certainly didn’t start out well. A truly awful first quarter had economists scrambling to trim their 2014 Gross Domestic Product (GDP) estimates, just in time for a healthy spring rebound. Growth has since leveled off in the 3 percent range, according to the Commerce Department, a minor acceleration from the half-baked levels (2 percent–2.5 percent) of previous years. The current growth trend doesn’t provide robust revenue growth for business, so financial “engineering” remains the preferred method for hitting Wall Street profit targets. Public companies continue to refinance debt, limit capital spending and buy record amounts of their own stock. They also continue to aggressively manage their taxes. So aggressively, in fact, that in September the U.S. Treasury felt compelled to issue new rules limiting the benefits of so-called tax “inversions”—the practice of acquiring a foreign company in order to switch domiciles and gain a lower tax bill.

After six years of recession and tepid and halting growth, extremes like renouncing U.S. tax “citizenship” likely mark a peak in financial engineering, but the broader point has been made: there’s only so much managements can do to keep cranking out profits in a punk economy. As we commented last January, instead of continuing to do “more with less” via financial engineering, corporate America needs to do “more with more” in the form of increased investment in people, technology and facilities. This is what would really get the economy moving again. Obviously CEOs are not going to take these steps unless they see signs that consumer demand has revived enough to justify new investment. Again, there are signs that this is happening.

A key driver of consumer spending is employment. According to the Labor Department, America will create about 2.5 million new jobs in 2014, the most since 2005. The unemployment rate has fallen to 5.9 percent. Median household income remains below the peak set in 1999, but rising employment and healthier household balance sheets have at least put consumers in a better position to spend. The banks are beginning to do their part as well. After stagnating for nearly 6 years post the 2008 financial crisis, U.S. bank lending (as measured by the FDIC quarterly survey) increased 5.25 percent in the year ending June. This is the fastest year-over-year growth since 2007. Higher loan balances and associated spending are contributing to a leveling off of monetary velocity, a measure of how frequently each dollar in the economy turns over. The Federal Reserve informs us that money velocity has been declining steadily since 2006, and a positive turn in this measure could indicate that the appetite for real risk-taking (as opposed to financial speculation) has revived. The recent 20 percent drop in world oil prices should help as well, providing consumers with some extra discretionary dollars as the holiday season approaches. In the U.S., where last year some $2,900 per household was spent on gasoline, the windfall totals about $600 per household.

Rising household incomes and renewed credit growth may give the economy the boost it needs to reach escape velocity. Six years after the financial crisis, record low approval ratings for politicians of every stripe indicate that patience is wearing thin in middle- and working-class households. People are tired of platitudes, and want to see results in the form of accelerating wages and increased purchasing power. Recent trends are hopeful. We should know soon if years of patience are about to be rewarded.

Nathan Boxx, Bradley Newman, Jason Seltzer

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