Through the second half of 2007 to the
collapse of Bear Stearns, US equity indexes were
leading America into recession. Markets were
discounting shares to reflect serious and
prolonged earnings and profit reduction. Stock
prices were indicating a long hard fall. Serious
turmoil in the financial industry, housing
collapse and macro-economic weakness were seen as
imminent and selling pressure was relentless.
As little and late assistance was offered
by the Federal Reserve, other central banks and
governments, there were short reversals. Selling
became buying for a few weeks to a few days. It
never took long for markets to fall after the
euphoria and false promises
were sniffed out. The Fed
led the world in offering monetary policy
accommodation. Rates were slashed, credit was
pumped, soothing words were shouted in any and all
directions. This basically failed until late
March. The public waited until the pain hit.
Through the end of 2007, the overall economy was
generating decent numbers and the public ignored
the financial turmoil.
leadership has become the world's most celebrated
laggardship. Since late March 2008, we have seen
an unbroken series of worsening economic data.
February, March and April saw net losses in US
employment, stagnant to negative income growth,
near zero gross domestic product growth and rising
inflation. The most recent 1Q 2008 GDP Advance
Estimate from the Bureau of Economic Analysis
makes clear just how bad things are.
Unplanned inventory investment and
government spending (much on the military) are the
primary providers of "growth". The inability of
businesses to sell as much as planned is, in the
short term, pushing up GDP. A rather tame looking
3.7% annualized inflation measure was used to turn
nominal GDP into real GDP. Nominal GDP is the
dollar sum total of all final goods spending done
in the US. It becomes real GDP when we extract the
increases in spending created only by rising
prices, as opposed to more economic activity.
If slightly higher inflation had been
factored, as many feel it should have been, GDP
would have actually fallen. Final estimates are
very sensitive to the size of estimated inflation.
Our official number, 0.6% growth, is so low that
any meaningful increase in inflation estimate
would create a negative GDP number.
labor market is defined by shrinkage. The American
consumer is squeezed from above and below.
Official jobs data offer a useful glimpse into a
parallel universe. Here on planet Earth, in the
area called the United States of America, the
following fun facts from the Bureau of Labor
Statistics are never reported: 261,000 jobs have
been officially lost since New Year's Day 2008.
There has been an 850,000-person increase in
involuntary part-time employment over the last 12
months. There are 1.4 million people "marginally
attached to the labor force".
been an increase of 800,000 officially unemployed
persons in the US over the last year. Thus, we are
presiding over a 1.65 million minimum increase in
unemployed and underemployed persons since April
2007. All the while our population grows, even if
the labor force does not. The average workweek and
average weekly earnings both declined in April.
All of this is before we consider rapidly rising
The economy continues down, led by
housing, consumer sentiment, employment and
earnings. As the market has clawed back up, data
has made recessionary conditions increasingly
clear. The S&P500 has gone from 1,447 on
January 2 this year to 1,413.90 on May 2. In other
words, the market is basically flat and is off by
2%. If adjusted for inflation, the loss would be
greater than 5%. Since March 17, the markets have
trended boldly higher amid rising public woe. The
S&P500 is up 11% since the Bear Stearns low.
As we entered this downturn we were in the process
of breaking many old records. Household debt
levels were massive. We have nearly US$10.6
trillion in household debt. House price reductions
already suggest $2 trillion to $3 trillion in
paper real estate losses.
recovery broke records for the greatest proportion
of earnings for corporations and the lowest for
households. It is hard to imagine a way for
American firms to grow their earnings here despite
household weakness. Folks already can't afford to
be borrowing as much as they have and earning as
little as they do. Staple items are somewhere
between painfully expensive and out of reach for
many. We have spiking food, energy and associated
This is a classic scissors crisis
for America's middle class. They are being hit
from the cash flow and earnings side. Years of
stagnant earnings and now pinched firms mean few
wage increases and rising unemployment. Houses
cannot be borrowed against as prices are falling
and debt levels are too high. On the cost side,
prices are rising much faster than wages. It is
pretty hard to stop buying food, electricity, gas
and things made with food or energy inputs!
The market is rising as the news turns
worse. Stocks forecast a sharp recession, until
one arrived. Now the markets are forecasting a
short, shallow downturn. This would be easier to
believe if something more serious had not already
arrived for millions of households. There is no
slack in the domestic household economy. Private
consumption accounts for over 65% of GDP. Deeply
indebted, fragile state, federal and family
budgets cannot absorb the blows already falling.
For profits to hold recent record levels,
let alone rise, firms would have to get miracle
returns in foreign currency and then convert them
to declining dollars. This would allow their
numbers to grow. Even this unlikely case risks
being overwhelmed by falling demand, rising anger
and default in the US.
This election will
be about the economy. Even if it is fought over
other "issues" and focuses on the usual
meaningless micro-trends. The next 12 to 18 months
will see a test of public response to an
existential risk to a significant portion of the
American middle class. Recent sentiment and market
performance aside, there remains no question that
serious economic weakness has arrived.
Beware the "buying opportunity" in real
estate and equity markets. Be focused on the
Wolff is a doctoral candidate in
economics at the University of Massachusetts,
Amherst, and editor of the website