Friday, March 12, 2010

Again, not so Zen

I decided to tackle discussing something that I have been pondering for awhile, and as my customary proviso I am stating that this probably isn't a new idea. It deals with the economy, and why we are in for a long period of adjustment. In previous installments I commented on the state of manufacturing in this country. That we must embrace bringing it back, at the same time recognizing the total cost of products produced and sold.

Something beyond over speculation in real estate, bank irresponsibility and a service based economy with it fits and starts has caused the stall we are seeing. What has held the stock market at bay for 10 years. Sane indicators on the stock market, using traditional measures, indicate the market is at a proper level. Take for instance GE, the first stock to be put in the Dow Jones Industrial Average. It is trading at about $17 with earnings per share at a price/earnings multiplier of 16.

So why the stagnation in growth compared to the 1980's through 2000? I believe it was caused by reaching saturation of two income households. If you look at data about traditional households (defined by married couple, one income earner, children) the percentage fell from 24% of households, to a 7% and has held for several years. This was over a period from 1970 to 1995. In addition, in households without children over this same period, two income households remained relatively stable. This indicated that as a second income entered into the "traditional" household it feed unprecedented growth, because it was mostly discretionary money. Money above and beyond needed for the basics of housing, food, clothing, a car. The data would also suggest that it may have fed inflation in the late 70's as oil and other natural resources were taxed to support this expanding economy (as well as the instability in the Middle East). Productivity gains made in the early 80's through the emergence of computer technology into a basically service economy and stabilization of the markets in oil calmed inflation following a tightening of credit by the fed.

What am I getting at with all this analysis? That now we have reached saturation of the two income households, we are likely to return to the lower rates of growth (or perhaps less due to lack of a manufacturing based economy)that preceded the 1980's.

I think the expectation for return on the stock markets the reflect the economy are going to have to be adjusted. In addition, I will continue to beat the drum for investment back into a manufacturing based economy. There are data that suggests that follow-on spending from manufacturing far exceeds that which is caused by a service economy. Data also suggest that jobs pay better in manufacturing. I have argued that it acts as a flywheel damping the spin up and down of a service-based economy. We are seeing the disappearance of the middle class due to all these factors.

I have also beat the drum for another action that needs to be taken. It transcends the health care issue, terrorism, and all that is heard and seen on the news. I will take that on next time. But here is a preview in one word: Energy.

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