Does this look like a picture of recovery?


Location: Santiago, Chile

A few years ago back when I used to watch an occasional bit of television, I would always have an internal debate with myself: which was more funny– Comedy Central, or CNBC?

It was always a toss-up. One channel has talking puppets. The other has Steven Colbert. Both are satires of our bizarre reality.

These days it seems financial media has surged ahead in this contest, rolling out one expert guest after another to beat a steady drum that economic recovery has settled on terra firma.

Now, I’m an optimistic guy… and there are plenty of good news stories around the world. But just looking at the numbers, it’s clear that there is a major disconnect between sentiment and reality.

On one hand, western governments and mainstream media sources tell people that their economies are recovering and moving forward. Sentiment is high, confidence is growing. Unfortunately the data show a completely different story:

  1. In the US, while the official unemployment rate is falling, a much better indication of the labor market is the Labor Force Participation Rate– the percentage of people within a society who are engaged in the work force.

    It rose steadily for decades after World War II as more and more women entered the work force, peaking in the late 1990s/early 2000s. It has been in terminal decline for the past ten years, having now reached the same level as from the late 1970s.

    Labor Force Participation

    Mirroring this point is private sector data from Automatic Data Processing, the largest payroll services firm in the world. ADP regularly releases its own employment data– they are, after all, the ones who send out the paychecks…

    According to ADP data, the number of people employed in the United States today (111 million) is roughly the same as in 2001. Yet back then, there were about 285 million people in the US. Today there are 315 million people.

    So the conclusion is that there has been no growth in the number of jobs, far more people in the country, and far fewer of them ‘participating’ in the work force. This can hardly be called progress.

  2. We’re also told that consumer spending is coming back. The US Commerce Department has reported that spending edged higher for the last several months, giving rise to even more optimism.

    This may be true. However the other side to this story is that (a) US wages as a percentage of GDP are at a record low; and (b) consumer credit has been steadily rising since early 2011.

    Consumer Credit

    So what we’re really seeing is US shoppers who are either unemployed or earning record low wages going deeper into debt to buy stuff. Somehow this is a source of optimism.

  3. Since 2008, large US companies have been able to enjoy absurdly low interest rates, plus a very forgiving society when they lay off workers.

Clearly this combination of cheap capital, lower payroll expense, and consumers willing to indebt themselves to buy products is positive for corporate profits. But is it sustainable?

In the long run, are strong corporate profits underpinned by cheap funny money and bankrupt consumers? Or strong, vibrant, productive economies? I would suggest the latter.

This analysis isn’t intended to be negative; bear in mind, numbers don’t have feelings. Data is simply truth. But the gulf between truth and perception is now astoundingly vast. And there are dangerous consequences to this, just as we have seen in the recent past. Welcome to 2007 all over again.

About the author

Simon Black

About the author

James Hickman (aka Simon Black) is an international investor, entrepreneur, and founder of Sovereign Man. His free daily e-letter Notes from the Field is about using the experiences from his life and travels to help you achieve more freedom, make more money, keep more of it, and protect it all from bankrupt governments.

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