This article tries to show two sides to the news of stagnant median incomes. First, the article draws a questionable conclusion from the data:
The Census report, viewed as a gauge of American prosperity, could mark a turning point for the recovery: It suggests consumers may soon start to feel the benefits of a steady, if sluggish, pickup in jobs…
The clause after the colon makes the assumption that a steady and sluggish pickup in jobs will create benefits, and this is false. Strong, robust job growth is required to lift the boats of consumers, nothing less. When the economy is creating new jobs at a rapid clip, the demand for labor outstrips the supply, raising wages for all workers in the process.
Today’s pace of job growth is enough to allow American consumers to tread water, and there is nothing in the data that suggests that attaining a state of stagnancy marks an inflection point signaling increasing incomes. The true, parlous state of the labor market is revealed deeper in the article:
- Incomes remain 8% below 2007 peaks.
- 11 million Americans are still seeking work
The only thing you need to know is that 1 is a direct result of 2.
When the economy is strong, increasing demand generally stokes inflation as can be seen above from Jan 2002 to 2008 during the post 9/11 recovery. Today’s monetary easing is based on the theory that this process also works in reverse. That is, printing more money to purchase bonds will stoke inflation leading to a pickup in economic growth.
Current theory does not account for the diminishing marginal returns of easy money. Each successive round of monetary easing has resulted in less benefits inuring to the American people:
At one time, the Fed’s actions would be expected to lift the economy from its doldrums, but too many years of loose money have taken their toll. Today, the best we can hope for from additional money printing is stagnancy, which is different from stability.
I selected an article each from the Wall Street Journal, Bloomberg.com and CNBC.com for this post about Homebuilder Confidence. Note how each headline endows the news of a flat index with a positive spin.
The first headline, “Homebuilder Confidence Hits a Pause,” makes a very bullish assumption by characterizing the data as a “pause.” By using this word, the headline implies that the index will resume its rise.
The WSJ gives a more accurate headline. The data does tend to show that homebuilders are confident for future prospects but show their underlying caution by not increasing hiring, unfortunately, the article misses a chance to expound on the cognitive dissonance in the results: If homebuilders are really confident, then why aren’t they hiring new workers and expanding production at a faster pace?
The third headline highlights the fact that confidence remains as high as last month, but then this information is not placed into context. The index remains at historical lows as compared to every other recovery since the 80’s. This poor showing is despite the fact that this is the fastest, largest increase in the index since its inception.
Low rates spurred increased housing activity, but now that rates have risen the market will only be driven higher if consumer incomes rise, and the evidence indicates that this is a long way off.
Today, the yield on Italy’s benchmark sovereign bond has once again dropped below Spain’s. The reason is that Berlusconi is backing off threats to dissolve the government if he is expelled from the Senate. His inner circle persuaded him that political discord would damage his media holdings. I am not so sure that he will go away so easily. He may lie low for a few months, but rest assured Bunga has something up his sleeve.