Last year we shared our perspective on surviving the middle class recession of 2014. We argued that wages for the middle class were mired in a muck of government policy intervention that left them stagnant. We questioned the Fed’s timing in ending QE and beginning an ill-timed assault on “wage inequality”. A year ago we cited research by economist David Henderson that dispels the myth that poor people benefit from a minimum wage increase:
- Only 11.3 percent of workers who would gain from the increase live in households officially defined as poor.
- A whopping 63.2 percent of workers who would gain were second or even third earners living in households with incomes equal to twice the poverty line or more.
- Some 42.3 percent of workers who would gain were second or even third earners who live in households that have incomes equal to three times the poverty line or more.
A year later
Nothing about the government’s war on the middle class has changed. President Obama still wants to tax the rich and raise the minimum wage. Janet Yellen has ended QE (for now) and insisted that despite deflation (due to collapsing energy prices) being more likely than inflation this year, she is intent on raising rates which will likely end the barely measurable economic recovery that exists.
We now have evidence that the middle class has been in recession instead of recovery. Let’s examine the new jobs that are supposed to be leading us out of recession.
The President boasts that his economy created 10 million jobs:
Houston, we have a Problem
There is a problem with the President taking credit for this. 93% of the jobs the economy has created have been in the energy industry. An industry that Obama is hostile towards:
A Single Industry Recovery
The oil patch created 93% of the jobs during the recovery and a over 1 trillion dollars of GDP. The rest of the economy only created 7% of the jobs. It is hard to characterize these numbers as a robust, widespread recovery. Unless you are in the oil industry, you have had to fight for scraps in this “recovery”.
Paying the Price
Falling energy prices are taking a heavy toll on the industry that created 9.3 million of the 10 million jobs during the recovery. In December Reuters reported that permits for new rigs dropped 40%. The drop in permits presages a 60-90 decline in rigs. Fewer rigs mean fewer people working these rigs.
Expectedly, the decline in rig permits was followed by layoff announcements this month from Slumberger (-9000) Baker Hughes (-7000 jobs), Halliburton (-1,000) and Suncor (-1,000) to name a few.
These lost jobs were paying considerably more than minimum wage and the crunch isn’t over yet. Domestically, crude inventories are running 11.5% higher than the five year average. Companies are slashing their capital expenditure budgets to preserve profitability. This will have a longer term impact on the industry’s ability to grow once oil prices stabilize.
This has the folks at Standard & Poor’s scurrying to revise earnings estimates for the S&P 500:
Energy estimates have declined 53.04% for 2015 from June 2014. Energy was expected to contribute 12.40% of the S&P 500 earnings in 2015 (back in June 2014), and is now estimated to contribute 6.56%. Energy earnings are now expected to post a 39.07% decline in 2015 over 2014, with 2014 already being reduced for Q4:14.
Repeat after me, “Lower energy prices are good for the economy and the stock market.”
Despite the rapid collapse in the one industry that has been a shining light in our economic recovery, the President announced in his State of the Union speech that “everything is awesome.”
“The verdict is clear,” Mr. Obama said. “Middle-class economics works. Expanding opportunity works. And these policies will continue to work, as long as politics don’t get in the way.”
The Presidents misplaced optimism was echoed by the Federal Reserve this week.
“Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow.”
Despite acknowledging that inflation is declining instead of increasing, the Federal Reserve insists on raising rates. The markets digested the Fed’s desire to raise rates in a deflationary environment and used the news on January 28th as another reason to sell stocks.
The Fed statement was also optimistic that wages will increase this year in response to tight labor market conditions. That would truly be awesome news for the middle class.
The Death of Small Businesses
Jim Clifton, Chairman and CEO of Gallup updated his analysis of small business activity in America. Small business startup activity is an important engine for new jobs in our economy so new business activity is important to follow. He compares new business startups to businesses closures.
“There has been an underground earthquake. As you read this, we are at minus 70,000 in terms of business survival. The data are very slow coming out of the U.S. Department of Census, via the Small Business Administration, so it lags real time by two years…
I don’t want to sound like a doomsayer, but when small and medium-sized businesses are dying faster than they’re being born, so is free enterprise. And when free enterprise dies, America dies with it” Jim Clifton, Chairman Gallup
The Employment Picture
Wage stagnation has persisted throughout the past decade (yes, even going back to the previous administration). Cheap financing from 2000 to 2007 provided consumers with the ability to leverage their stagnant wages into more economic activity than they could otherwise afford. Since the recession “ended” in 2009, sub-prime mortgages have morphed into sub-prime auto loans that have propped up the consumer spending numbers.
This consumer spending problem has been glossed over by population growth and inflation. Doug Short, (one of the few macro bloggers who keeps his politics out of his analysis), recently analyzed the impact of these two factors on consumer spending and the results are startling. On the surface, retail sales look like they are well into recovery mode:
After adjusting this data to reflect population growth of about 25% since 1992 and inflation (CPI) we see a different story:
Here is Doug’s conclusion:
The Great Recession of the Financial Crisis is behind us, a close analysis of the adjusted data suggests that the recovery has been frustratingly slow. The reality is that, in “real” terms — adjusted for population growth and inflation — consumer sales remain below the level we saw at the peak before the last recession.
The middle class desperately needs a pay raise, or more work hours to boost their income. The Fed argues that a tight labor market is on the verge of boosting wages in competition for workers. Let’s examine where these new workers are coming from.
At the end of 2013 a divided US Congress could reach agreement on renewing unemployment benefits so the benefits ended. This affected 1.3 million people who were receiving unemployment benefit checks. A new study from the National Bureau of Economic Research (NBER) makes a strong case that reducing these benefits pushed affected workers off the sidelines and back into the workforce. Interestingly, these unemployed workers, who were probably already looking for work, were forced by the loss of benefits to find any employment even if that meant at a lower wage that what they were previously pursuing.
The study estimates that half of the jobs created last year (1.8 million) could be attributed to this benefit cut. These workers didn’t reenter the workforce to accept the position of their dreams. They were forced into the workforce on their employers’ terms. This isn’t an environment that pressures employers to raise wages dramatically.
These benefit reductions helped reverse the trend in the labor force participation rate in 2014. The decline in available workers, those actively seeking employment lead to a number of theories about changing dynamics in our society. Most of these studies argue that our aging baby boomers will lead to lower participation in the labor force than previous decades and that we need to accept that fewer workers will be available. Again, Doug Short’s detailed analysis demolishes this theory:
“The percentage of elderly employment is hovering at its historic high — now double its low in the mid-1980s. This is a trend with multiple root causes, most notably longer lifespans, the decline in private sector pensions and frequent cases of insufficient financial planning. Another major cause, I would argue, is the often surprising discovery by many of the elderly that the “golden years of retirement” might be less personally satisfying than productive employment.” Doug Short
Without touching the tinder box of illegal/undocumented immigration policies, it is clear that our labor market remains suspect. Outside of a few technical industries that require specialized training (that Silicon Valley wants to import into the US) wages will do well to keep up with inflation/deflation.
Conclusion
Understanding reality is the first step to surviving this mess. If you are part of the middle class, you are not crazy to think that your situation is harder than what your political leaders want you to believe. The middle class has yet to recover its jobs, wages, benefits or wealth that it lost in 2008. If you’re not on a government, Wall Street or corporate executive suite payroll, you are waiting for the recovery to reach your family while you work harder than ever to get ahead.
You may need to move your family to another region with better job dynamics. You should broaden your skill set to make you more valuable to the workplace. Do what is necessary to save money so you have some capital to maybe start your own business someday.
This middle class recession might not end until the next recession hits our economy.
