How to Reconcile July’s Rising Markets with July’s Dismal Economic News
-Eugene Linden
The question has been posed many times recently: Why are the markets rising when the economy seems to be heading back into the tank. Simple, the markets have been going up in part because the economy is going back into the tank. One major factor that has stalled the recovery – job losses – earlier provided a temporary boon for companies. Unit labor costs have been falling rapidly, roughly 5% since the fourth quarter of 2009. This has boosted productivity and earnings, but what is a cost for employers is livelihood for households. Yes, over 80% of reporting companies are beating earnings estimates, only 68% have been beating top-line estimates, which, notes David Rosenberg of Gluskin Sheff, is less than when the economy was free-falling in 2008. Companies have been making their numbers by cutting costs, not increasing sales. Martin Feldstein, President Emeritus of the National Bureau of Economic Research, the organization that officially calls recessions, pointed out during a Bloomberg interview that the group has not called the end of the recession in part because final sales have been lame at best: if first quarter GDP had been based on final sales, it would have risen 1.2% not the revised 3.7% (and Feldstein points out that the 1.2% is an annualized figure so that the final sales contribution to GDP in the quarter was negligible).
This is not good news either for future S&P earnings or the future of the economy. Those laid off employees are going to be consuming less in the coming years. Jacob Hacker of Yale made news recently with a study sponsored by the Rockefeller Foundation and Yale University on economic security that argued that in the past year, one in five American households suffered income losses greater than 25%. After suffering this type of shock, it usually takes several years to get back to even, and during those years a household’s budget will be stretched to the breaking point, particularly since the typical American household has very little savings and diminishing access to credit.
So while the market, or at least the infernal robots that now seem to constitute the market, embraced the earnings, these nice results are coming to some degree at the cost of future consumption which constitutes more than 70% of GDP. Question: how many times can that card be played?
