Economic indicators should, by definition, provide an indication of where the economy is headed, yet since the 2008 financial crisis – and even more so since the beginning of the bull market – the generation of inconsisntent data has been the only thing the economy does with any consistency. The chaos has accompanied a bull market for quite some time, but that's hardly reassuring, as it has also accompanied sluggish growth and wage stagnation, things with which the bull market will not for much longer be able to coexist.
Consider some of the economic reports from august, which were released either this week or last week: Personal Income rose a small amount in August, but Personal Spending rose more. Taken together, New Home Sales and Existing Home Sales were considerably higher than anticipated, so a healthy real estate market must be helping to buoy the economy. Then, in September – as we just learned this Wednesday morning – Construction Spending was unexpectedly weak across the board, with declining orders coming in from residential, commercial and even government customers. This stinging malaise was accompanied by a great ADP Employment Change report, showing that the economy added 213K jobs in September instead of the expected 202K.
One might well ask, as I myself have, isn't this all just healthy chaos? Maybe, and maybe not. We remain in an environment of sustained low-wage growth, interest rates near zero, and massive quantitative easing. If we forget how historically abnormal this environment is, the oversight could lead to very bad assumptions. It is time to accept that the abnormalities in our economic environment – wage stagnation and quantitative easing – may have something to do with each other. If the quantitative easing were engaging the economy as hoped, we would already be enjoying higher wages. Instead, all we are doing is grinding the gears.
Perhaps when we are done with QE, sometime in 2015, more people will conclude that what we have needed all along is a more old-fashioned remedy. Instead putting money into pathetic stock buybacks that serve only a tiny number, companies should pay it to the workers and consumers. Stock buybacks do make stocks go up, but as companies become more and more addictied to share-price manipulation, they will make bigger and bigger sacrifices to keep the juice flowing. We're seeing this already, not just in the low wages they pay, but in the extent to which they feel justified in avoiding paying taxes, e.g., inversion… Once every company is on board, the public sector will be bankrupt and consumers won't have any spending money. Then corporate earnings will tank, and all those “bought” stock price gains will disappear overnight.
All we really need to do is encourage American companies to reinvest a healthy percentage of their profits back into their workforces – just as they have historically done. To achieve this end, I would happily use the tax code to punish companies that don't comply. Certainly, we will need to make a few examples, so we'll start with the worst offenders – the ones who's workforces are so poor that their workers are on public assistance. Perhaps to be sure it has made its point, as well as to settle this old debt, the government should take two or three times as much money from these companies as it can prove it is owed — just as with insider trading!
I concede that this “solution” may lie outside of anyone's real world policy latitude, but when it comes to fixing wage stagnation, the time has certainly come to recognize, if nothing else, that we are in sore need of some solution.
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.