After years of getting my economic news from the media, I eventually realized that the picture painted by their favorite experts like Paul ‘Chicken Little’ Krugman is far from complete or balanced. I knew there was something wrong because the constant predictions of doom and disaster seemed so contradictory to the economic realities of the lives of the people around me. To try to be better informed, I’ve made it a habit for the last few years of seeking my economic news closer to the source by actually examining the hard data which government number crunchers at the Bureau of Economic Analysis and the Bureau of Labor Statistics compile month in and month out.
My explorations of arcane tables and reports have led me to discoveries of both good and bad news in the economy, and to a wealth of detailed data which is very informative, but often overlooked. Periodically I pick out the most interesting bits of economic news and try to share some observations and some facts about the windfalls and pitfalls which face Americans as they earn and spend and try to make better lives for themselves.
The Overall Picture
The big numbers on the economy remain good, continuing the improving pattern of the last couple of years. Gross Domestic Product grew at a healthy 3.3% last year. Unemployment was at a low 4.5%. Consumer spending increased by 3.6%. Overall personal income was up 5.5%. Corporate profits were up a whopping 21.4%. Consumer prices were up only 2.8%. And, of course, the stock market performed well during the last year, with the 5 most popular mutual funds averaging a 14.7% return.
The Bad News
These days there are two kinds of bad news, the real bad news which gets only limited press coverage and the fake bad news which gets a lot of politically opportunistic attention. More on the fake kind later, because there is some real economic news that’s troubling. The main problem seems to be what consumers are doing with the money they have left over after covering necessary expenses. A few years ago savings and investing were up. Then we saw the tech boom bust and a weak real estate market and all of a sudden everyone was putting their savings into real estate, buying new homes and taking big loans at excellent rates to do it.
This was great and made a lot of sense and drove the recovery from the recession. But now the real estate market is on a slide in many parts of the country. A lot of people overextended themselves and bought bigger houses than they could really afford. Others bought houses with poor credit or low income under very aggressive, even deceptive lending practices which got them into starter homes with zero down and no credit or even income qualifications in many cases. People put all their savings into their homes and now they’re seeing those homes declining in value and difficult to sell. In some cases they’re also having trouble meeting variable rate or even balloon rate payments. Defaults and foreclosures are up and new home sales are down.
As a result, for a full two years people have been dipping into their savings rather than adding to them. It hasn’t been by a huge amount, but with -.4% savings in 2005 and -1.1% savings in 2006 there’s some reason to be concerned. Disposable income is only up 1.3% in that same period, so more than just that negative savings rate is going into paying more interest and dealing with debt and other expenses. It has to be frustrating for consumers who feel this squeeze. Their wages are substantially higher, they’ve got a nice new house, but their budgets are tighter than ever and they’re putting less money away than they were a few years ago. With the housing market weak, the equity they’ve built up in their houses is effectively devalued, though that value will come back if they can hold out until the market inevitably comes around again.
The Good News
Ironically, the good news is in the areas which are often the focus of cries of despair from those whose view of the economy is flavored by their political agenda. Their two big issues are usually the ‘Trade Deficit’ and the ‘Income Gap’. They may have to find different issues to beat their drum about, because the numbers on these two indicators are better than they’ve been in years.
I’m not going to go into whether the trade imbalance between the United States and trading partners overseas is a real problem or even meaningful. I think the concept is basically outdated in a global economy, but many people still swear by the idea that roughly the same amount of value in goods and money should go out of the country as comes into it. For years we’ve been in a situation where we have had more net outflow than income. Our money went overseas and their products came here, and not enough of our goods went out of the country to bring in foreign money. This trend has been going on for a while, and is a pet peeve of the doom and gloom crankisphere as typified by Lou Dobbs. They may have to find a new complaint, because the latest numbers from the BEA show that not only did our exports increase 9.2% in 2006, but imports were even down by 2.2% last year. That’s a 11.4% improvement in our balance of trade in one year, which is pretty damned impressive. The figures also show a substantial improvement in the ratio of services exported to services imported, suggesting that the much feared job outsourcing is largely offset by new work opportunities being brought to this country from overseas.
Another surprising positive sign is that we seem to be closing the income gap between the top and bottom wage earners. There has been a lot of complaining that the middle class is vanishing and the gap between the rich and everyone else is growing, but the figures just don’t support that theory. While middle class salaries have increased at close to the national average of 3.75% for last year, wages for workers in the lowest paid industries have been increasing dramatically. Laboring wages increased 4%. Earnings in service industry jobs were up 7.6%. Last year middle class workers saw improvement in wages for technical jobs in comparison to managerial jobs. For example, computer related jobs had a 7.3% wage increase while degreed professionals gained only 2.75% and managerial jobs gained only 1.75%.
When looking at the ‘income gap’ between workers and their ultimate bosses, there is a marked inclination among ‘deeply concerned’ analysts to base their conclusions on only the most outrageously overpaid CEOs from the hugest megacorporations who receive compenasion comensurate with the size and profits of the businesses in their charge. Comparing their salaries with those of workers is hardly fair when you consider that the overwhelming majority of CEOs run small to medium size businesses and most workers work for those companies not giant multinationals whose CEOs are essentially part of the international economy rather than the US economy.
In reality, the average salary of corporate CEOs in the US was only $97,500 last year. In comparison the average worker earned $36,036 for the year. That’s less, but the gap isn’t that huge. More significantly, the CEO’s salary went up only 2.2% on average, less than the rate of inflation, while the average worker’s wages went up 3.75% for the year, close to twice as much. If you look at low wage workers the gains made relative to CEOs are even greater, with those at the bottom end of the economy gaining more pay at a rate 4% or more above the rate at which CEO salaries increased. Even part time workers showed a 5.5% increase in wages for 2006, two and a half times the rate of salary increase enjoyed by CEOs. So the wage gap which some have gone so far as to suggest justifies a revolution and signifies the death of the middle class, isn’t as large or as unfair as it may seem, if low-end workers are seeing their wages increase at a substantially higher rate than those above them on the pay scale.
What it All Means
While some would like to present you with a picture of an economy of growing inequality, despair and impending economic collapse, they’re showing you that image through a distorting lens. The reality is that the places where they see failure have shown the strongest improvement in the last year, and all of the other major indicators suggest that the economy is remarkably strong. Yes, there are problems, particularly in how people are managing their personal finances and in the real estate sector. But the fact that those problems seem not to be reflected in the stock market, GDP or consumer spending suggests that they are temporary and outweighed by all the other positive forces in the economy.