Why Main Street Doesn't Buy Wall Street's 'Recovery'

Wall StreetTo many observers, the stock market is a leading indicator of the economy: If stocks are rising, they take it as strong evidence that the economy is improving.

Yet even after the S&P 500 has soared 80% from its March 2009 lows, 70% of Americans don't believe the recession is over.

Let's look at some data to see if Main Street's grasp on reality is firmer than Wall Street's.

Income

The stock market rally off the March 2009 lows was by some measures the sharpest such advance in the past 100 years. Yet at the same time as stocks went on a tear, household income kept declining. According to the Census Bureau, the median U.S. household income fell 0.7% to $49,777 in 2009, down 4.2% since pre-recession 2007.

As I noted in a DailyFinance column in October, the Federal Reserve's stated policy objective is to boost the stock market to trigger the "wealth effect": If people see their 401(k) and IRA accounts rising in value, they'll feel wealthier, even if they aren't directly spending any of those assets. In theory, consumers who feel richer are more willing to open their wallets and start spending, boosting economic activity.



Unfortunately, the Fed failed to consider that only the wealthiest slice of households hold enough stocks to see much benefit from a rising market. As noted above, household incomes actually fell, despite the huge run-up in stocks. In other words, the Fed is gambling on an effect with no evidence to support it.

Employment


While the Bureau of Labor Statistics reported that the economy added 151,000 jobs in October, that good news must be viewed in a broader context of sustained employment weakness: The BLS also reported the number of "discouraged workers" increased by 411,000 and the labor participation rate fell again.

Here is one way to understand why that matters. If there are 20 workers participating in the economy, and 10 are unemployed, then the unemployment rate is 50%. If nine of those unemployed drop out and stop looking for work, they become "discouraged workers," and the unemployment rate magically drops to 9%. Now there are 10 employed workers and only one officially unemployed person.

In other words, a falling unemployment rate can reflect not just more people getting jobs, but fewer people actively looking for them in the labor pool.

Here is a chart which depicts the declining labor participation rate.



The total number of employed people has bounced off a low, but has since flat-lined (see chart below). If the "persons employed part-time for economic reasons" (a BLS category) and those "marginally attached" (jobless but not counted by the BLS as unemployed because they have not searched for work in the four weeks preceding the survey), then the under-employment/unemployment rate jumps to more than 17%.



This helps explain why the recovery appears so tepid to two-thirds of Americans: In terms of employment, it clearly is. The chart below compares the current employment arc with those of previous recessions, and makes it painfully obvious that the job market is merely limping along, not recovering.




In contrast to previous recessions, the number of unemployed who have been jobless for 26 weeks or longer has skyrocketed, suggesting there is a structural dearth of jobs being created in the economy.



Government Spending

As the next chart illustrates, the primary reason the recession wasn't deeper was that the federal government embarked on an unprecedented borrowing-and-spending binge. The federal deficit (that is, the increase in the national debt) was $1.6 trillion for fiscal year 2010, about the same size as the 2009 deficit.

So the federal government borrowed and spent roughly 11% of the nation's entire GDP. Economists who believe that the government should "spend our way out of recession" (the Keynesians) have been unable to explain why borrowing and spending a staggering $3.2 trillion in only two years has done little beyond maintaining the status quo.



But the money has been borrowed, and future taxpayers will see their incomes diverted to pay the interest on all that additional debt.

Even worse, the long-term liabilities being heaped on future taxpayers are growing by trillions every year. By some accounts, the unfunded liabilities for Social Security and Medicare alone (leaving aside all other government spending) are a mind-boggling $106 trillion.



Wall Street may be cheering this level of government borrowing and spending, but Main Street recognizes it is unhealthy and doomed to end badly for the American public.

Inflation and the Rising Cost of Living

Though the official rate of inflation is a minuscule 1.1%, Main Street Americans sense this isn't accurate when it comes to food and other essentials. As many observers have noted, containers and package sizes are shrinking, meaning consumers are getting less for their money. This sort of "hidden inflation" is not picked up by the official statistics.

The Commodity Research Bureau index of commodities, the CRB, is a widely recognized measure of commodity prices. The CRB has shot up 28% since the Federal Reserve announced its QE2 quantitative easing program. While Wall Street is beside itself with joy over QE2, Main Street looks down the road and sees huge prices increases ahead in food, energy and other essentials.

QE2 has certainly benefited Wall Street, but it has sucker punched Main Street with sharply higher prices in agricultural and energy commodities.



State and Local Taxes

Many observers find state and local tax revenues to be a more reliable measure of economic activity than GDP or unemployment statistics. After all, we only pay those taxes out of real income and actual sales.

While state and local taxes edged up 2.2% in the second quarter (the latest for which data is available), indicating modest improvement in the real economy, the numbers are still considerably lower than they were in 2008 before the financial crisis triggered the recession.

According to the Census Bureau, total state and local taxes have slumped $38 billion compared to the second quarter of 2008 -- roughly16%. Individual income tax revenues plummeted by almost 20% (from $99 billion to $71 billion), corporate taxes fell by 18% and sales taxes are off by about 5%.

Reflecting state and local governments' raising of tax rates and fees, vehicle taxes actually rose 5%, and despite the steep declines in property values since 2008, property taxes actually rose 14.7% from 2008 as municipalities jacked up tax rates.

With tax revenues based on incomes and consumption still way down from pre-recession totals, and the only increases in revenues coming from sharply higher tax rates and fees, it's no wonder Main Street is less enthusiastic than Wall Street about the economy's recovery.

Increase your money and finance knowledge from home

Investment Strategies

What's your investing game plan?

View Course »

Investing in Real Estate

Learn the basics of investing in real estate.

View Course »

Add a Comment

*0 / 3000 Character Maximum

354 Comments

Filter by:
Mickylitz

mickylitz 6:09 AM Nov 12, 2010 •(0) vote this comment up •(0) vote this comment down • bushwasadisaster,,, Some of you people should read the letter Titled " I'm tired " By Robert A. Hall a Marine Vietnam veteran who served five terms in the Massachusetts State Senate just to get an idea ot where America is headed....or do you even care ? here is a sample: I'm tired of being told that I have to "spread the wealth" to people who don't have my work ethic. I'm tired of being told the government will take the money I earned, by force if necessary, and give it to people too lazy to earn it. I'm tired of being told that I have to pay more taxes to "keep people in their homes." Sure, if they lost their jobs or got sick, I'm willing to help. But if they bought McMansions at three times the price of our paid-off, $250,000 condo, on one-third of my salary, then let the left-wing Congress-critters who passed Fannie and Freddie and the Community Reinvestment Act that created the bubble help them with their own money. I'm tired of being told how bad America is by left-wing millionaires like Michael Moore, George Soros and Hollywood Entertainers who live in luxury because of the opportunities America offers. In thirty years, if they get their way, the United States will have the economy of Zimbabwe , the freedom of the press of China the crime and violence of Mexico , the tolerance for Christian people of Iran , and the freedom of speech of Venezuela . urbanlegends.about.com/od/dubiousquotes/a/robert_a_ha...

November 12 2010 at 6:12 AM Report abuse rate up rate down Reply
BHarrison2

What type of a charade is all of this: As they say, the banks are "flush with money" that they are NOT loaing in mortgages . . . yet they are "advertsing "record cheap mortgage rates". The reality is that the banks earn more interests off deposits in the PRIVATELY OWNED Federal Reserve Bank, than they will make off of these supposedly "record cheap mortgages". Ergo the banks are making an extremely low amount of mortgage loans. So, what is being told to the public about cheap mortgates is a FABRICATION to deceive the public. THEN "the Fed" convolutes the "need for a $600 BILLION" "stimulus" to promote mortgages . . . but the banks are ALREADY NOT LOANING the money that they are reportedly so "flush with". This is just another FRAUD and associated lies to try to justify the FRAUD. It is a basis (a "game") for the Fed to generate their own "stimulus" to boost the financial markets . . . NOT to create jobs or to boost mortgages. "Lowering mortgage rates" is a convoluted FRAUD against ALL Americans. The banks have plenty of money to loan as mortgages; they just aren't and won't do that . . . the system is broken and being exploited to further enrich the ALREADY WEALTHY by boosting the stock and commodities markets. The American people are being defrauded with EACH ACTION by the Fed.

November 12 2010 at 5:32 AM Report abuse rate up rate down Reply
stick4013

Alas Babylon

November 11 2010 at 11:58 PM Report abuse rate up rate down Reply
bill griffis

i wonder what the founder fathers will think about all thsee taxes

November 11 2010 at 10:21 PM Report abuse +1 rate up rate down Reply
stag01987

I agree that The President did indeed inherit a disaster, but it was caused by the dems and repubs. Hardly any elected official is looking out for We The People. They only take care of the corporations who own them. I do support the president on some things, but not everything, just the same as I supported our previous president. And bushwasadisaster, I find offense in your comment about our vets suicide rate. They are trying to protect innocent people and give them hope while protecting our way of life. You and I have absolutely no idea what kind of crap they have to endure over there.

November 11 2010 at 9:01 PM Report abuse rate up rate down Reply
savemycountry911

S. Korea told Obummer to take a hike. He gets and deserves no respect.

November 11 2010 at 8:42 PM Report abuse -1 rate up rate down Reply
savemycountry911

Just like an anti-American looney lib to criticize the American people. What are you bushwas? An illegal?

November 11 2010 at 8:00 PM Report abuse rate up rate down Reply
savemycountry911

bushwas, That shellacking really has you upset, right?

November 11 2010 at 7:48 PM Report abuse +1 rate up rate down Reply
savemycountry911

VETS AND ACTIVE MILITARY: THANK YOU FOR YOUR SERVICE. TOO BAD THE SOCIALIST IN THE WHITE HOUSE DIDN'T HONOR YOU.

November 11 2010 at 7:44 PM Report abuse +1 rate up rate down Reply
1 reply to savemycountry911's comment
courtjester19500

Yeah - obummer has yet to honor a single veteran or active duty military person - or even the Flag! Watch his "crotch salute", when others are putting their hands over their hearts or saluting...

November 12 2010 at 5:19 PM Report abuse rate up rate down Reply
savemycountry911

Obummer wanted our soldiers to pay for their own healthcare. A disgrace

November 11 2010 at 7:41 PM Report abuse rate up rate down Reply