Back in July I wrote about a “great divergence” that has been occurring between the stock market and the real economy. Yet today one might consider that recent developments put the lie to my claim. After all, while stock prices soar, the unemployment rate continues to fall. The November number was 6.7 percent, down from 6.9 percent in October. With imminent release of a new Covid-19 vaccine expected, all the major equity indices appear – almost irrationally – to have gone into hyperdrive. But why not? If, as expected, the new vaccines prove effective, there seems every reason to anticipate an end to the economic crisis – if not a wholesale recovery.
I won’t devote space on this commentary to reasons we might be skeptical about the return to anything resembling normality. Other, that is, than to remind my readers that the headline unemployment statistic is highly misleading – and increasingly so. If people stop looking for work out of despondency or hopelessness, they simply drop out of the labor force. Yet what it means, bizarrely, is that they do not count as being unemployed.
And Americans all over have indeed stopped looking for work. It is nothing short of noteworthy that the U.S. labor force participation rate has been declining for over twenty years. After almost four decades of increase, mostly attributable to the mass entry of females into the workforce, there has been a major shift. After peaking at 67.2 percent in 1998 – 8.1 percentage points higher than the baseline 1947 number (see Chart) – only 61.5 percent of our adult population is in the labor force 22 years later. If it does not sound like much of a drop, consider that if the same percentage as in 1998 were participating, more than nine million additional people – who presently do not count among the unemployed – would be in the labor force.
Sources: U.S. Census, Federal Reserve Bank, St. Louis, Wall Street Journal.
While there has been a sharp decline over the past year, the graph makes clear that people have been exiting the labor force for a long time. The reasons for the decrease are many and cannot occupy us here. But the trend ought to concern everyone.
What is more, declining labor force participation is almost perfectly reinforced by stagnant incomes. After increasing almost 80 percent from 1947 to 2000 in inflation-adjusted terms, the U.S. median income has mostly remained flat over the past two decades. This despite the fact that real GDP has increased more than ninefold since 1947. How can this be? Is GDP not itself a measure of income? How can the discrepancy be so large?
In short, yes and no. The economic output that GDP measures translates directly to income once all the produced goods and services are sold. But the problem is that income is not only wage or salary compensation. The reason that the median income trendline has diverged from GDP is that a shrinking share of GDP is, over time, accounted for by labor employment. According to the Bureau of Labor Statistics, labor’s share of the total economic pie has dropped from a peak of about 66 percent in 1960 to about 59 percent today. Correspondingly, of course, a growing share of national income or GDP is accounted for by asset returns – dividends, interest, rents, and the like. Little wonder that U.S. income inequality is again approaching its historical peak from a century ago.
You might also notice that U.S. median income stagnation and the peak of labor force participation more or less coincide with the beginning of an exponential rise in the S&P index, a measure of corporate stock performance (leaving aside two short-lived “corrections” in the 2000s). So, if nothing else, the evidence presented here makes clear why the runup in stocks that we have seen, really since the beginning of the 1990s, should be mostly irrelevant to a majority of Americans. Did I mention inequality?
If there were a real basis for stock market optimism, it is of little consequence to the U.S. economy. (Even on the left, many maintain that the bank bailouts in the wake of the financial crisis a decade ago were warranted; I am not convinced.) And more likely the asset gains are illusory, and we are poised for a major correction. The Fed’s mass expansion of its balance sheet in order to prop up the nation’s shaky finances is surely unsustainable. And the decline in the value of the dollar, if it were to continue, would undoubtedly cause an exodus of foreign capital.
Predicting when a major reckoning is in the offing is devilishly complex. I’ve mostly been wrong about it for the past three decades. But let us hope that when it happens our leaders will have “divergence” on their minds and think twice before bailing out the asset holders.