By Charles Biderman
The stock market continues to move upward. The market value of all US stocks is $22 trillion, a whopping $13 trillion increase from the March 2009 low and roughly equal to the all-time peak reached in October 2007. The more the stock market has gone up the more investors, economists and financial commentators, all firmly believe that the U.S. economy is on the verge of rapid growth.
And this belief in the growth fairy is not new. Going back to 2010, the Fed, economists and money managers have all been saying consistently, while stock prices kept rising, that the U.S. economy would grow faster over the succeeding six months. It hasn’t happened. For the last four years stock prices have gone up, but the economy has not grown any faster. And while July’s BLS jobs report might not show it, job growth is currently slowing. In fact wages and salaries are growing slower now due to the June spike in mortgage rates on top of higher 2013 taxes.
It is important to point out that the slower growth has nothing to do with the sequester nonsense. Government spending is down less than $30 billion so far this fiscal year. The main reason the budget deficit is down by $250 billion or so is higher income taxes and a 60 or so percent gain in capital gains taxes paid this year on gains taken at the end of 2012.
As many of you know, I track withheld income and employment taxes reported daily by the U.S. Treasury. Adjusting for higher taxes we estimate wage and salary growth has slowed to 2.2 percent year over year before inflation. That is less than one percent after inflation. Before higher interest rates impacted the mortgage market; wages and salaries had been growing by just over 3.5 percent nominally. But following the impact of higher rates in late June the rate of growth has steadily slowed. In other words, while low mortgage rates did boost incomes over the past year, now higher mortgage rates are slowing income growth.
And yes, the Bureau of Labor Statistics has been reporting monthly job gains of 160,000 to 190,000 ever since early 2011. But so what? Many of those jobs are part time and barely over the minimum wage. And while this is being videoed before the BLS reports its estimate of July jobs, the BLS number as well as the ADP number from the other day are likely to be overstating the rate of new July jobs.
Why? The BLS jobs survey and therefore the ADP report, are based on data from the week that includes the 12th day of the month. In July that was the second week. That week was when nominal wage and salary first dropped below three percent. Since then wages and salary growth has slowed even further. That means that the BLS July number is likely to overstate what is really happening. That also means that in August, we should see massive July revisions downward as well as a weak August jobs number.
Again, what evidence is there that the US economy will grow faster in the future? I do not see anything, particularly if mortgage rates stay over four percent. Remember all US and global public companies, other than banks, are reporting, at best, flat earnings and revenue growth.
A bubble in economic terms is when prices soar in relationship to the underlying value. That is what is happening as central banks have been printing trillions with to buy financial assets. At some point the bubble will burst. The slower the rate of growth we have from here, the bigger the bust when it happens.
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