COLUMN LEFT/ ORIN KRAMER : When Wallets and Indicators Don’t Agree : Joblessness and declining net worth belie false strength in the stock market.
On Tuesday, the Commerce Department announced that the economy appeared to have grown moderately during the third quarter. Almost simultaneously, the closely followed Conference Board survey reported that consumer confidence had dropped for the fourth consecutive month. Tuesday afternoon, the Dow Jones Average closed within about 5% of its all-time high.
This apparently incongruous picture--a bull market, modest economic growth and deep public pessimism--reflects a pattern that undoubtedly drives the White House batty. Why do polls reflect a dark public mood when the economy is technically growing? If the economy is in trouble, why are stock prices, which theoretically predict future economic activity, so high?
Those who would suggest that it is still morning in America blame the public distemper on the media and other so-called declinists. There is, however, an alternative hypothesis: that aggregate economic growth data mask serious structural problems, that the public intuitively senses this and that the stock market is strong because the real economy is weak. If so, it would help explain why those who were slow to grasp the depth of our economic malaise remain complacent about the future.
The public is in a funk because the modest growth we have experienced has come at the expense of permanent jobs, a downshift in the quality of employment and lower personal incomes. Prior cyclical recessions were characterized by temporary layoffs, but today’s structural decline is about firings. The jobless rate itself understates the erosion occurring in the work force. Part-time and temporary employment is rising, cushioning the jobless rate, while permanent staff cuts are coming at a rate of 1,700 per day.
Thus the Bureau of Labor Statistics reported that California lost 50,000 jobs in the first quarter of 1992, only to have the state announce that the figure was actually 400,000. Ultimately, the state Department of Finance forced federal bureaucrats to concede that the employment overcount was national and totaled more than 1 million jobs.
The downsizing of the work force has been exacerbated by the inability of policy-makers to match the 1980s debt buildup with income and economic growth sufficient to service that debt. Much has been made of the fact that recently, the ratio of consumer debt to personal income reached the highest levels since the 1930s. What observers have missed is that if personal incomes had grown between 1988 and today at normal rates, the average consumer’s debt burden relative to income would be lower today than it was in 1980.
But with incomes and home prices down, household net worth declined in 1991 for only the second time in half a century. Consumers are churlish because they are getting poorer, and declining income cuts their ability to pay off debt.
The proposition that a strong stock market augurs a vibrant economy stands on weak stilts. For starters, with the average stock selling 30% or more below its 1992 high, investors might be pardoned for wondering whether we are still in a bull market. But financial markets do not move logically in response to macroeconomic forces. Stocks will rise only when there are more buyers than sellers.
For the first eight months of 1992, the net inflow of money from individuals to stock mutual funds totaled $51 billion, compared with $21 billion for the same period a year ago. Most people haven’t fared well with those investments, but that’s the point: Dollars keep flowing into stocks, thereby supporting prices, despite mediocre recent returns and high prices.
The money keeps coming because with the lowest interest rates since the 1960s and the lowest passbook rates since 1936, there’s nowhere else for it to go. It’s not going into investment--in plants, equipment and job creation--in the real economy. In short, stock prices are being propped up by liquidity, which is likely to vanish if and when the real economy strengthens. The market is strong because it’s the only game in town--nothing for policy-makers to crow about.
Deflating the biggest debt bubble since the 1930s and dealing with long-term changes in the workplace won’t be easy. But after the weakest four years of economic growth since World War II, it ought to be clear that those structural problems cannot be addressed in a slow-growth environment without leaving profound economic and psychological scars. Until we get a dose of meaningful public investment, the consumer confidence readings seem right on target.
