Our President tells us that “The economy is booming”, but is it? What we really want to know is, what’s booming, what isn’t booming, and what’s booming for whom? Before we go there, we first must know what it is that is booming or not booming. So let’s start with the question, what is the “economy”?
There are numerous definitions of the word “economy”. Investopedia defines the economy as follows:
“The economy is the total of all activities related to production and consumption of limited resources by a group of participants”1.
The Oxford English Dictionary defines the economy as
“The wealth and resources of a country or region, especially in terms of the production and consumption of goods and services”2.
Clearly, the economy is related to activities involved in production and consumption and to wealth. But how do we measure it to know if it’s doing well or poorly? The most commonly reported measure of the economy is Gross Domestic Product (GDP) which is measured in dollars. That’s a measure of production and consumption, but it tells us nothing about wealth. We seldom read about any measures of wealth, but there is one report that reflects wealth that comes to us in a constant stream, namely the stock market reports. Stock market indices are measures of corporate wealth held by the public3. There are other economic measures of course, including labor force participation and unemployment rates, but GDP and stock market reports are the two most commonly referred to when talking about the economy. So let’s look at what’s happening with them and how they affect us.
First, the Bureau of Economic Analyses (a branch of the Department of Commerce) reports that the economy is in free fall. More precisely, the GDP fell 5% in the first quarter of this year (an annual rate of 21.6%) and fell at an estimated annual rate of 31% in the second quarter. Labor force participation, another measure of economic activity (seldom reported) has dropped to 61% from an all time high of 67% in 20004. Similarly, the unemployment rate5 has climbed to 10.2% from 3.8% at the beginning of the year6. From these figures, it’s hard to believe the economy is booming.
Now let’s consider the stock market. The Dow-Jones Industrial Stock index is 2,291 points above it’s level one year ago, and in spite of taking a nose dive in March (as a result of the COVID-19 pandemic), it has recovered all but 898 points from its all time high of 29,551 in mid February. Other stock market indices reflect an identical pattern, so from that standpoint, the stock market is thriving.
How do we reconcile this and what does it mean to each of us? First, a falling GDP means losing jobs, income, health insurance coverage, and ability to purchase necessities and pay bills for many people. For those who lose jobs and lack sufficient savings7, this can result in loss of property including their homes and automobiles. For the many Americans, this is not good juju. Does the thriving stock market help them? The President claims that all Americans benefit from a rising stock market. (“How’s your 401k doing?”) Unfortunately, only 52% of all Americans have any direct or indirect8 investment in the stock market9 leaving 48% with none. Furthermore, 84% of all stocks are owned by the wealthiest 10% of households10, leaving 42% of Americans to share only 16% of the stocks through direct or indirect ownership. Finally, those most likely to lose jobs are the ones who have the least savings and no ownership in the stock market. The conclusion then is that no matter how you look at it, the economy is not booming in any respect for the vast majority of Americans.
So what about the wealthy Americans? If you define wealthy Americans as those having assets in excess of $1 million (11.7% of all households11) you will find three things. First, if they are employed, they are employed as executives or professionals that are seldom affected in layoffs. Second, they may be rentiers (people who derive income from ownership of income earning property). Third, they have reserves to carry them over any period of unemployment and cover emergencies. In this case, the falling GDP doesn’t hurt them and since they own 84% of all stocks, the rising stock market helps boosts their wealth.
In conclusion, the President is about 10% correct. The economy, as measured by GDP, stock market, unemployment, labor force and wealth indices is booming for about 10% of Americans. But for the remaining 90% of Americans it definitely is not booming and for at least 11.8%12 of Americans, it’s a disaster13.
PS A rising stock market in the midst of a falling GDP is a curious phenomenon considering that both fell in past recessions/depressions and intuitively, one would believe that both should rise and fall together. For those of you with somewhat masochistic tendencies who really want to know, I have attempted to explain what I think is happening in this note.
3 Stock market indices are poor measures of wealth as they do not begin to include the vast amount of wealth held privately or by the government; but they are the only measures of wealth that are reported continuously and are referred to by investors, economists, financial advisors, politicians and the general public.
4 As reported by FRED.
5 Unemployment rate is also a very poor measure as it only accounts for those people actively seeking unemployment compensation. It does not include those for whom unemployment compensation has expired or those who have simply dropped out of the labor force.
6 As reported by the Bureau of Labor Statistics.
7 According to Statistica, 80% of Americans have less than $5,000 in savings to fall back on, 69% have less than $1,000 and 49% have no savings. (Even $5,000 doesn’t go far when you are out of work.)
8 Indirect investment through Mutual Funds, 401k’s and other retirement programs.
13 Two other measures of the economy are the income and wealth inequality indices otherwise known as the Gini indices. The United States ranks 27th highest in income inequality and 4th highest in wealth inequality which further indicates that the economy is working very well for a few people, but not for the vast majority.