By Anthony Mirhaydari, MSN Money
Link
Economists tell us the economic recovery is more than two years old. Corporate profits have zoomed to record highs. Countries such as China and Brazil have roared back.
But by just about every other measure, it's as if the 2007 recession never ended. Industrial production, retail sales, employment, home prices, construction activity, inventories and retail sales are all below pre-recession levels. In inflation-adjusted terms, the economy is smaller than it was before the downturn. That's nearly four years of no growth.
The truth is, our problems are deeper and go back further. One example: Stocks are coming off their worst 10-year performance since the Great Depression, trading at levels first reached in 1998.
In fact, I'd argue that the real recession began a decade or more ago and hasn't ended. The key problem -- stagnant wages -- has only gotten worse. It hasn't mattered who was in the White House or in control of Congress. It's structural, and it's related to globalization and the rise of China.
Americans in general have felt this for years; the good news is that the folks in Washington have finally started to notice, too. But until they do something, we need to prepare our portfolios and pocketbooks for more no-growth years ahead.
I've got some ideas on how to do that. But first, let's look at how this mess began.
No growth here
Comparing our most recent run to the rebound from the last four recessions, Credit Suisse economist Neal Soss finds that the economy should be 10% larger, consumer spending 14% higher, housing investment 25% higher, business investment 10% higher and wages 30% higher than they are now.
So what's the problem?
Employers, scared by the 2008 financial crisis, cut jobs more deeply than experts expected. They've gotten used to smaller workforces and the big profit margins that go with them, thanks to outsourcing and automation.
Other factors include the fallout from the housing bubble and the financial crisis, and new worries over the creditworthiness of Western nations. Credit Suisse strategist Andrew Garthwaite estimates that the rich world is sitting on $8 trillion in excess debt -- mortgages, student loans, Treasury bonds. That's dead weight holding down the recovery.
This is all rooted in a deeper problem -- a wage recession that never ended.
Incomes have been stagnant since the Clinton administration. In the interim, a lot of us used higher stock prices and home values, fueled by cheap credit, to supplement our paychecks, It was merely a temporary reprieve that's left behind a pile of debt, battered 401k's, underwater mortgages and broken dreams.
The truth is, we never fully escaped the 2001 recession.
The root of the problem
Part of the reason wages stalled was technology. Mainly, though, it was the rise of globalization.
Of the 27 million jobs the U.S. economy created in the two decades before the latest recession began in 2007, the vast majority were in "nontradable" sectors of the economy like government, health care, construction, retail and hospitality, notes economist and Nobel laureate Michael Spence. These are positions that can't be shipped overseas.
Those gains haven't offset job losses in "tradable" sectors such manufacturing. Private-sector payrolls are now at levels first reached in 1999, despite a steady increase in the overall population. As a result, the employment-to-population ratio is at 1980s levels and still falling.
The result, to use the textbook explanation, has been a drop in the marginal return to labor.
Put simply, there are fewer American jobs to go around, so they pay less -- with predictable results.
Working hard for less money
Adjusted for inflation, new data from the U.S. Census Bureau show incomes are down to 1996 levels. This buries details like this one: Most of the jobs created in the past few decades have been in nontradable, service- or government-based vocations dominated by women. The median full-time male worker is making just $48,000 a year, the same as in 1969 in real terms.
But this never-ending recession is about more than just income. It's about a wholesale neglect of the drivers of America's success: shared opportunity and prosperity, a commitment to excellence in the institutions of society, and a reinvestment in the future of our country.
More than 46 million Americans are living in poverty, the worst reading in the 52 years the government has tracked the data. Nearly 50 million have no health insurance. Household net worth for the middle fifth has fallen by 26% in the past two years. Twenty-two percent of all American children live in poverty. And in 313 counties all across our land, life expectancy for women has actually declined over the past 20 years.
In fact, according to the Organisation for Economic Co-Operation and Development, the United States has the highest overall poverty rate and highest childhood poverty rate of any major industrialized country. For comparison, just 3.7% of the children in Denmark, 8.3% in Germany and 9.3% in France live below the poverty line.
There's more.
We're failing our children with inadequate education. The OECD ranks the United States 17th in the world for reading, 31st for math and 23rd for science. Shanghai, China, tops the chart in all categories, followed by Hong Kong, Finland and Singapore.
Young adults are finding it harder to get started in life: Nearly half of 25-to-34 year olds are living below the poverty line when their parents' income is excluded.
And we're quickly becoming obsolete as our infrastructure decays.
Businesses are under-investing, not even maintaining existing capacity that is rusting away. The OECD ranks us 19th in the world for high-speed Internet access, behind Korea, Iceland and France. The American Society of Civil Engineers estimates that we need to spend $2.2 trillion over the next five years to address failing roads, bridges and water systems.
It's happened before
In many respects, the current situation resembles the Gilded Age of the late 1800s and the Long Depression, a global downturn that lasted from the 1870s through the 1890s. Replace the Robber Barons with hedge fund managers and multinational CEOs, and the agitation over Free Silver with the Tea Party and the debate over the Federal Reserve's stimulus efforts, and the similarities are striking.
It was preceded by a period of global economic integration as steam power, the telegraph and railroads made the world smaller. Labor was displaced by technology and foreign competition. The banking system was rocked by the panics of 1873, 1884 and 1893, driven by real-estate bubbles and stock speculation.
Our current role was played by the United Kingdom, an aging sovereign struggling to maintain its role as the world's superpower. The role of the upstart United States is now played by vigorous up-and-comers like China and India. Check out this excerpt from A.E. Musson's "The Great Depression in Britain, 1873-1896: A Reappraisal"
"Britain was losing her technological lead; she was failing to modernize her plant, to develop new processes, or to modify her industrial structure with the same rapidity as Germany and the United States -- owing to conservatism, the heavy cost of replacing old plant, and deficiencies in technical education."
In other words, the British got lazy, making them vulnerable. We have the same problem now.
The import-vs.-export equation
The other part of the problem for the U.K. back then will also sound familiar: a loss of export activity and a flood of cheap imports.
Free trade works only if all parties play by the rules. If you embrace free trade but your partner doesn't -- consider the way China holds down the value of its currency and uses state-owned entities to steal technology -- research by the National Bureau of Economic Research shows that your economy will suffer more than if you erect trade barriers and tariffs.
Musson writes that there was little doubt that a stagnation of British exports was "one of the most critical aspects" of the downturn and that aggression by trade partners was a primary cause.
He writes: "Foreign trusts also adopted a vigorous policy of 'pushing' their goods abroad . . . while foreign industry and trade were greatly assisted by protective tariffs, export bounties, 'drawbacks,' and special low rates of rail transport. British business, on the other hand, had no such fiscal protection and assistance in this Free Trade era."
The result was a rise in calls for reciprocity and "fair trade." It was argued that for Britain, like the United States now, it would be ruinous to remain an open market when competitors were strongly protectionist. The result was a swing toward protectionism.
Capital Economics, the global research outfit based in London, wrote in a note to clients earlier this year that while protectionism is "far from an ideal policy" and carries serious dangers, "in current circumstances it may offer America the only way out of its difficulties."
What the politicians might do
So, what can be done?
We're starting to see rumblings in the right direction by both Republicans and Democrats.
GOP presidential candidate and former Massachusetts governor Mitt Romney, in his plan to restore the American economy, wants the U.S. Treasury to label China a currency manipulator -- an action that will set in motion a process toward trade protections if the Chinese don't take action.
Among Democrats, President Barack Obama went after Chinese tire imports and just this week took action against Chinese duties on U.S. poultry exports. Senate Majority Leader Harry Reid said last week he would take up legislation against Chinese imports in response to its alleged currency manipulation. And the U.S. ambassador to China on Tuesday called China's currency "substantially undervalued."
Watch for protectionist sentiments to increase as the 2012 election approaches and the economy continues to stagnate. It's an issue that forms a rare nexus of agreement among members on both extremes of the political spectrum: The far left is worried about environmental protection and unemployment, while the far right is worried about national pride and the trade deficit.
But policymakers are further apart on other issues and stumped by how to pay for things like infrastructure and education. And I don't expect this to change at least until after the 2012 election.
So personally, prepare for slow, halting growth for the foreseeable future. Not a crisis. Not Armageddon. Just a continuation of the long grind we've been stuck in.
What you can do at home
In the market, we're going to see bursts of positive news and job creation, punctuated by panics and scares. I believe stocks will outperform bonds and cash in the years to come, given the relationship of earnings power to interest rates. But structural problems will hold the economy back.
For investors, the key to success in this environment is to remain nimble and focus only on the areas of the market demonstrating relative strength for a few months at a time before moving on. I outlined a way to do this in my last column. (Read "Your biggest enemy now? Fear.")
Right now I'm telling MSN Money readers and my newsletter subscribers to focus on technology, semiconductor and key transportation stocks. Highlights include Silicon Motion Technology (SIMO -6.47%, news), Delta Air Lines (DAL -5.25%, news) and Maxim Integrated Products (MXIM -3.87%, news), which are up 16.1%, 6.3%, and 7.5% since I recommended them last week. (SIMO has been added to my sample portfolio, which tracks my recommendations for MSN Money readers in real time here.)
I'll have more recommendations along these lines in the coming weeks. I'm afraid I don't have an answer for our wage and growth recession; I only hope to help us get through it.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company mentioned in this column. He has recommended Delta Air Lines, Silicon Motion Technology and Maxim Integrated Products to his newsletter subscribers.
Link
Economists tell us the economic recovery is more than two years old. Corporate profits have zoomed to record highs. Countries such as China and Brazil have roared back.
But by just about every other measure, it's as if the 2007 recession never ended. Industrial production, retail sales, employment, home prices, construction activity, inventories and retail sales are all below pre-recession levels. In inflation-adjusted terms, the economy is smaller than it was before the downturn. That's nearly four years of no growth.
The truth is, our problems are deeper and go back further. One example: Stocks are coming off their worst 10-year performance since the Great Depression, trading at levels first reached in 1998.
In fact, I'd argue that the real recession began a decade or more ago and hasn't ended. The key problem -- stagnant wages -- has only gotten worse. It hasn't mattered who was in the White House or in control of Congress. It's structural, and it's related to globalization and the rise of China.
Americans in general have felt this for years; the good news is that the folks in Washington have finally started to notice, too. But until they do something, we need to prepare our portfolios and pocketbooks for more no-growth years ahead.
I've got some ideas on how to do that. But first, let's look at how this mess began.
No growth here
Comparing our most recent run to the rebound from the last four recessions, Credit Suisse economist Neal Soss finds that the economy should be 10% larger, consumer spending 14% higher, housing investment 25% higher, business investment 10% higher and wages 30% higher than they are now.
So what's the problem?
Employers, scared by the 2008 financial crisis, cut jobs more deeply than experts expected. They've gotten used to smaller workforces and the big profit margins that go with them, thanks to outsourcing and automation.
Other factors include the fallout from the housing bubble and the financial crisis, and new worries over the creditworthiness of Western nations. Credit Suisse strategist Andrew Garthwaite estimates that the rich world is sitting on $8 trillion in excess debt -- mortgages, student loans, Treasury bonds. That's dead weight holding down the recovery.
This is all rooted in a deeper problem -- a wage recession that never ended.
Incomes have been stagnant since the Clinton administration. In the interim, a lot of us used higher stock prices and home values, fueled by cheap credit, to supplement our paychecks, It was merely a temporary reprieve that's left behind a pile of debt, battered 401k's, underwater mortgages and broken dreams.
The truth is, we never fully escaped the 2001 recession.
The root of the problem
Part of the reason wages stalled was technology. Mainly, though, it was the rise of globalization.
Of the 27 million jobs the U.S. economy created in the two decades before the latest recession began in 2007, the vast majority were in "nontradable" sectors of the economy like government, health care, construction, retail and hospitality, notes economist and Nobel laureate Michael Spence. These are positions that can't be shipped overseas.
Those gains haven't offset job losses in "tradable" sectors such manufacturing. Private-sector payrolls are now at levels first reached in 1999, despite a steady increase in the overall population. As a result, the employment-to-population ratio is at 1980s levels and still falling.
The result, to use the textbook explanation, has been a drop in the marginal return to labor.
Put simply, there are fewer American jobs to go around, so they pay less -- with predictable results.
Working hard for less money
Adjusted for inflation, new data from the U.S. Census Bureau show incomes are down to 1996 levels. This buries details like this one: Most of the jobs created in the past few decades have been in nontradable, service- or government-based vocations dominated by women. The median full-time male worker is making just $48,000 a year, the same as in 1969 in real terms.
But this never-ending recession is about more than just income. It's about a wholesale neglect of the drivers of America's success: shared opportunity and prosperity, a commitment to excellence in the institutions of society, and a reinvestment in the future of our country.
More than 46 million Americans are living in poverty, the worst reading in the 52 years the government has tracked the data. Nearly 50 million have no health insurance. Household net worth for the middle fifth has fallen by 26% in the past two years. Twenty-two percent of all American children live in poverty. And in 313 counties all across our land, life expectancy for women has actually declined over the past 20 years.
In fact, according to the Organisation for Economic Co-Operation and Development, the United States has the highest overall poverty rate and highest childhood poverty rate of any major industrialized country. For comparison, just 3.7% of the children in Denmark, 8.3% in Germany and 9.3% in France live below the poverty line.
There's more.
We're failing our children with inadequate education. The OECD ranks the United States 17th in the world for reading, 31st for math and 23rd for science. Shanghai, China, tops the chart in all categories, followed by Hong Kong, Finland and Singapore.
Young adults are finding it harder to get started in life: Nearly half of 25-to-34 year olds are living below the poverty line when their parents' income is excluded.
And we're quickly becoming obsolete as our infrastructure decays.
Businesses are under-investing, not even maintaining existing capacity that is rusting away. The OECD ranks us 19th in the world for high-speed Internet access, behind Korea, Iceland and France. The American Society of Civil Engineers estimates that we need to spend $2.2 trillion over the next five years to address failing roads, bridges and water systems.
It's happened before
In many respects, the current situation resembles the Gilded Age of the late 1800s and the Long Depression, a global downturn that lasted from the 1870s through the 1890s. Replace the Robber Barons with hedge fund managers and multinational CEOs, and the agitation over Free Silver with the Tea Party and the debate over the Federal Reserve's stimulus efforts, and the similarities are striking.
It was preceded by a period of global economic integration as steam power, the telegraph and railroads made the world smaller. Labor was displaced by technology and foreign competition. The banking system was rocked by the panics of 1873, 1884 and 1893, driven by real-estate bubbles and stock speculation.
Our current role was played by the United Kingdom, an aging sovereign struggling to maintain its role as the world's superpower. The role of the upstart United States is now played by vigorous up-and-comers like China and India. Check out this excerpt from A.E. Musson's "The Great Depression in Britain, 1873-1896: A Reappraisal"
"Britain was losing her technological lead; she was failing to modernize her plant, to develop new processes, or to modify her industrial structure with the same rapidity as Germany and the United States -- owing to conservatism, the heavy cost of replacing old plant, and deficiencies in technical education."
In other words, the British got lazy, making them vulnerable. We have the same problem now.
The import-vs.-export equation
The other part of the problem for the U.K. back then will also sound familiar: a loss of export activity and a flood of cheap imports.
Free trade works only if all parties play by the rules. If you embrace free trade but your partner doesn't -- consider the way China holds down the value of its currency and uses state-owned entities to steal technology -- research by the National Bureau of Economic Research shows that your economy will suffer more than if you erect trade barriers and tariffs.
Musson writes that there was little doubt that a stagnation of British exports was "one of the most critical aspects" of the downturn and that aggression by trade partners was a primary cause.
He writes: "Foreign trusts also adopted a vigorous policy of 'pushing' their goods abroad . . . while foreign industry and trade were greatly assisted by protective tariffs, export bounties, 'drawbacks,' and special low rates of rail transport. British business, on the other hand, had no such fiscal protection and assistance in this Free Trade era."
The result was a rise in calls for reciprocity and "fair trade." It was argued that for Britain, like the United States now, it would be ruinous to remain an open market when competitors were strongly protectionist. The result was a swing toward protectionism.
Capital Economics, the global research outfit based in London, wrote in a note to clients earlier this year that while protectionism is "far from an ideal policy" and carries serious dangers, "in current circumstances it may offer America the only way out of its difficulties."
What the politicians might do
So, what can be done?
We're starting to see rumblings in the right direction by both Republicans and Democrats.
GOP presidential candidate and former Massachusetts governor Mitt Romney, in his plan to restore the American economy, wants the U.S. Treasury to label China a currency manipulator -- an action that will set in motion a process toward trade protections if the Chinese don't take action.
Among Democrats, President Barack Obama went after Chinese tire imports and just this week took action against Chinese duties on U.S. poultry exports. Senate Majority Leader Harry Reid said last week he would take up legislation against Chinese imports in response to its alleged currency manipulation. And the U.S. ambassador to China on Tuesday called China's currency "substantially undervalued."
Watch for protectionist sentiments to increase as the 2012 election approaches and the economy continues to stagnate. It's an issue that forms a rare nexus of agreement among members on both extremes of the political spectrum: The far left is worried about environmental protection and unemployment, while the far right is worried about national pride and the trade deficit.
But policymakers are further apart on other issues and stumped by how to pay for things like infrastructure and education. And I don't expect this to change at least until after the 2012 election.
So personally, prepare for slow, halting growth for the foreseeable future. Not a crisis. Not Armageddon. Just a continuation of the long grind we've been stuck in.
What you can do at home
In the market, we're going to see bursts of positive news and job creation, punctuated by panics and scares. I believe stocks will outperform bonds and cash in the years to come, given the relationship of earnings power to interest rates. But structural problems will hold the economy back.
For investors, the key to success in this environment is to remain nimble and focus only on the areas of the market demonstrating relative strength for a few months at a time before moving on. I outlined a way to do this in my last column. (Read "Your biggest enemy now? Fear.")
Right now I'm telling MSN Money readers and my newsletter subscribers to focus on technology, semiconductor and key transportation stocks. Highlights include Silicon Motion Technology (SIMO -6.47%, news), Delta Air Lines (DAL -5.25%, news) and Maxim Integrated Products (MXIM -3.87%, news), which are up 16.1%, 6.3%, and 7.5% since I recommended them last week. (SIMO has been added to my sample portfolio, which tracks my recommendations for MSN Money readers in real time here.)
I'll have more recommendations along these lines in the coming weeks. I'm afraid I don't have an answer for our wage and growth recession; I only hope to help us get through it.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company mentioned in this column. He has recommended Delta Air Lines, Silicon Motion Technology and Maxim Integrated Products to his newsletter subscribers.
