If the Economy is Sick, Why do I Feel So Well?

There is an excellent article on NYT’s The Upshot blog that I came across today (though originally published on October 30th) by Neil Irwin, in which he discusses the problems with determining the mixed signals for the economy and what that portends for the future. (That is the SECOND time today that I got to use the word “portend”… take that word-of-the-day calendar.)

This led me back to mulling a topic that I’ve thought a great deal about, but have yet to publish here in my, now world “famous”, blog (I see readers from Brazil, Mexico, Italy and Poland… Thanks for reading, y’all!). Mainly I just gripe to the Wolf Pack’s long-suffering spouse about it on a regular basis. In brief, I argue that the real reason that the economy is sending mixed signals to economists is because the macroeconomic picture has become largely divorced from the microeconomic reality of the average consumer. I further argue here that this uncoupling of the average consumer experience from the macroeconomic picture is probably as dangerous as the murky picture we are receiving from the leading economic indicators.

Take, for example, mineral extraction (as you know, one of my faves), the banking industry and industrial manufacturing. As the price of oil has dropped, the profit margins in the extraction of minerals have been severely squeezed. This means that those companies engaging in the process are showing poor numbers in public filings… and many of these companies are large enough to be part of the Dow, S&P 500, etc. This means that those indices take a hit in this particular sector.

Yet, again as I have argued here before, the problems in the mineral production sector are highly contagious. Take the oil industry, for example. If one does not want to drill more wells, then one does not need any Caterpillar equipment to clear drilling pads in the middle of nowhere. One does not need to purchase large dump trucks to help fill in roads to these locations. One does not need to take out loans from a bank to purchase this equipment that one no longer needs. There is a need for less skilled labor, so the company that one uses to staff these temporary positions is no longer hired to build the roads and pads it no longer needs.

In the aggregate, this begins to look bad for the economy… All of these things are slowing down. Demand must be going down to too, right?  What about consumer sentiment???

Well, as these articles show, consumer sentiment is rising as is consumption.

“But wait, how is this possible?” The economists cry.

Well, I retort, it is because the average consumer does not obtain financing from JPMorgan’s investment banking arm for major capex projects. The average consumer does not buy a Mack truck or a Caterpillar road grader. The average consumer buys candy for Halloween. The average consumer, shockingly, buys gas. If gas prices stay cheap enough for long enough then they may go out and by that impractical Ford pickup they’ve had their eyes on for a couple of years.

So, let’s look at the filings of these businesses… Lo and behold, Ford and GM are posting record numbers! Hmm… Shocking. Consumer discretionary spending is on the rise.

“WAIT!” The academeratii say… “What about the corporations??? They’re people too!”

Which brings me to the apocalyptic rant section of this post. The fact that well-known economists are no longer able to see the view from the ground (i.e. the point of view of how the economy really works in the eye of the consumer) is dangerous. It should signal to us that the macroeconomic actors, and those that observe them, are no longer in touch with the individual consumers in this country and around the world. There is a functional misunderstanding here that the economy is somehow supposed to function for the good of these large organizations that are presently battered by slowdowns in certain areas.

This is not how the market should be either understood or analyzed… For, at the end of day, companies do not operate within these globally expanding networks supported by free trade agreements. Companies, at their core, may be people… but they are fictitious people. The actual people who work for these companies (along with everyone else) is receiving a stimulus from the lower commodities prices. Lower commodities means cheaper everything, from electronics, to vehicles, to the fuel that goes in them.

For too long this economy – and the consumers in it – suffered under the weight of a commodity price explosion. Larry Summers, et al., have wondered aloud why we have seen such sluggish growth since the 2008 financial crisis. The reason is that, in an era where the median household income has not risen in 30 years (adjusted for inflation), the actual market is highly sensitive to consumer demand shocks based on the price of underlying commodities. As the price for, say, oil, rises, then consumption across the board by real, live consumers must decrease.

It is a double whammy really, at least for real, everyday people. It takes more money to put gas in your car. Your car also costs more than it did a few years ago… but, this being America, you need your car. You, therefore, buy the iPhone 4 instead of the iPhone 5C – on the whole consumer demand stagnates.

What this looks like to economists and other academics is a sluggish economy with slow growth. What they cannot fathom, though, is the true reason why people are buying more stuff now – it is because real people buy less stuff when they have less money. Because the People Corporations have decided that they can forever increase worker productivity without increasing wages, the only real stimulus in the economy is a lower cost of living. Since real estate is, once again, becoming the ever rising asset, the only other place to receive that stimulus is from consumer spending in other sectors. In short, it’s the economy, stupid.

Let’s just say, for the sake of wacky argument here, that we want to recouple these macroeconomic indicators with the experience from the ground level… How do we get there? Hmm… Maybe that should be fodder for the next post! (Hehehe.)

This entry was posted in Economics, Foreign Policy, Public Affairs and tagged , , , . Bookmark the permalink.

2 Responses to If the Economy is Sick, Why do I Feel So Well?

  1. Shana says:

    I don’t even know how I ended up here, but I thought this post
    was good. I do not know who you are but definitely you are going to a famous blogger
    if you are not already 😉 Cheers!


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