In spite of a bumpy start in the financial markets in the first month of the New Year, we remain bullish on the potential for the growth of the economy at the macro and GDP level. We are bearish, however, on the potential for the growth of the economy overall at the micro or IEW level — that’s Individual Economic Well-being.
For the American economy to truly recover in 2014, we need growth at both levels. We need to grow Wall Street and Main Street. And, that growth needs to be reciprocal and reinforcing.
Unfortunately, over the past year, it hasn’t been. Positive outcomes in the economy writ large have not and do not necessarily translate into positive outcomes for the economy writ small. That’s the major takeaway and the lesson we should learn from 2013.
Last year was a very muddled one for the American economy. The stock market performed spectacularly with the Dow Jones Average, the S&P 500, and the NASDAQ all having growth rates of over 25 percent.
GDP growth was well up in the 3rd and 4th quarters at 4.1 percent and 3.2 percent respectively. The unemployment rate fell from 7.9 percent at the beginning of the year to 6.7 percent at the end.
Most major indicators at or near year’s end were sound. Consumer spending and confidence was up. Business CEO confidence was up. Factory activity in December was near a 2 1/2 year high and U.S. construction spending in November rose at the strongest pace in more than for years.
In spite of these strengthening macro-economic vital signs, there were some negatives.Wage growth was anemic and households were cutting into their savings to pay for purchases. Those negatives combined with the attitude of the American public cause us to be bearish on IEW-level growth.
In an NBC News/Wall Street Journal poll conducted in December, 70 percent of the respondents felt that 2013 was a “below average year” (44 percent) or “one of the worst years” (26% percent for the United States. A Harris poll at about the same time revealed that 74 percent of the respondents felt the economy would “get worse” (32 percent) or stay the same (42 percent) in 2014. A Quinnipiac poll just before the oresident’s State of the Union address showed that 77 percent of registered voters felt the economy was “not so good” or “poor”.
The reason for findings of this type is that in the United States today there is a highly bifurcated economy. We have an economy that is currently distributing income and benefits quite well to about 20 percent — especially to the top 1 percent — but an economy that is doing little for the middle class and below — the 80 percent.
Put another way there has been strong success in the Wall Street economy versus average to below average success in the main street economy. A December Associated Press survey of three dozen economists disclosed that they thought this wealth gap is hurting the United States economy and retarding its recovery.
As Gallup’s annual survey of the savings and investment habits of Americans for 2013 shows, the gap has also had a negative impact on participation in the stock market. Since the great recession, according to Gallup, the percentage of Americans who own stock has fallen from around 62 percent between 2000 and 2008 to 52 percent in 2013. Stock ownership has fallen steadily from 2009 through 2013 to be at its lowest level today since 1998.
Gallup attributes this drop primarily to the high unemployment rate. We agree but also believe that other factors such as “hang-over” fear from the great recession and the diminished financial and purchasing capacity of many citizens who might be potential market investors also play a role. Regardless of the reasons, there are a large group of Americans who are effectively precluded from sharing in stock market gains.
We think that the government and corporate sectors could collaborate to correct this current imbalance and insecurity. One way this might be done is as follows: The government could provide incentives for corporations holding approximately 2 trillion dollars in profits offshore to bring that money home at greatly reduced tax rates if the returned dollars are invested in American projects such as infrastructure development, building new plants, and job creation.
The government could also attach targeted jobs tax credits to the creation of “good paying” jobs. This would double the impact of this approach as an economic development tool. It would leverage public and private resources and have a multiplier effect stimulating economic growth and increasing discretionary income for individuals to use for purchases or investments.
In our opinion, doing something along the lines we propose would go a long way to overcoming the growing economic divide in the country. It would jump start a virtuous cycle that would benefit the market, the economy in general, and the American worker. That would be a win, win, win and begin to restore the trust that many Americans have lost in our dominant institutions.
America and the American dream has always been the province of the many and not the few. For many and for some time, so too has been the stock market.
If we grow Wall Street and Main Street in 2014, we can once again make the market pivotal to a broader group of Americans. They and the economy will be better off because of it.