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The Sky Is Not Falling Yet

Disraeli once said that there are three lies: lies, damned lies, and statistics.  After watching recent news coverage of the …

Disraeli once said that there are three lies: lies, damned lies, and statistics.  After watching recent news coverage of the economic situation in the US and evaluating the isolated statistics that are often cited, one might think that the United States economy is in the midst of a dire recession.  I am not sure that the news coverage remotely reflects what is really going on in our economy.   

Before diving into an analysis of our current economic situation, let’s talk about the basic things you might want in any economy, not just in the United States.  Let’s say you owned an island and that 100 people live on that island.  What basic things would you want for your economy and for the people who lived there?  My contention is that you would still have a healthy economy if all economic factors are bad EXCEPT the following basic metrics.  In other words, I believe the economy is good when these factors are good:

  1. People are employed; they have jobs.  It makes sense that having more people employed is good.  (Employment should be high. Unemployment should be low.) 
  2. People have healthy levels of income.  When people are working, they also want sustainable levels of personal income that they can spend. (Disposable income should be sufficient to pay bills.)
  3. The value of the currency that people hold today is worth roughly what it might have been worth a year ago or, say, five years ago.  (Inflation should be low.)
  4. People can buy things inexpensively on credit at good/low rates of interest.  (Interest rates should be low.)
  5. The level of “sales” of the economy is going up; the value of goods and services sold/traded is going up.  (Real GDP should be growing and strong.)

Now, my argument is that, no matter what other conditions and metrics exist in any particular economy, and no matter what factors some people might decide to focus on in their own analysis of that economy, other metrics are either a subset or are subservient to the major indicators above.  Essentially, if you are employed, if you can pay your bills, if you can borrow cheaply, if you can hold the value of what you own, and if you live in an economic climate that is growing, then it does not matter what other conditions might exist in an overall economy. 

If this is reasonable, then let’s look at the United States today.

  1. US Employment:  Today, 95% of United States citizens in the civilian labor force are employed.  (Our unemployment rate is roughly 5%.)  This means that 146.3M out of 153.9M people are employed.  Last year at this time, the unemployment percentage was 4.5%.  Five years ago, the percentage was 6%.  The average rate of unemployment over the past 50 years is 5.86%.[1]  So, the rate of unemployment is higher today than a year ago, but it is by no means stark.  In fact, if you assume rightly that a fair portion of people will be looking and switching jobs at any given point, it would be fair to set our unemployment rate at 0% (A fair number of economists have set the “natural” rate of unemployment at about 6% to account for those people temporarily off of payrolls.)  Some would argue that the current trend is bad, but they typically go too far in assuming that small trends will become long-term trends.  (These are the same types of forecasters who, in the 60s, projected overpopulation would cause worldwide economic calamity.)
  2. Disposable Income:  The average household income in 2006 was $48,201.  In 2005, it was $46,326.  Ten years ago it was $38,885.  Real US disposable income has been rising nicely for over 40 years.[2] On balance, it would be extremely difficult to contend that people have a lower standard of living today than 5 years ago. 
  3. US inflation:  The current rate of inflation is 3.98%.  Last year, it was 2.78%.  Over the past 50 years, the average rate has been about 4.10%.[3] While gas prices are definitely a problem in the US right now, especially for lower and middle income earners (and especially with relation to our dependence upon foreign oil), overall price inflation is acceptable and even positive.  (Do you remember the late 70s?)  Starting in the late 70s, Paul Volker’s Fed made a great and lasting effort to curb the devastating effects of inflation in the United States. 
  4. US interest rates:  If you want to buy a house today, the average 30-year mortgage will cost you 5.97%.  Ten years ago, the same interest rate might have been 7.13%.  Thirty years ago, the rate would have been 9.2%.[4] The “credit crunch” we are experiencing (whatever that is; I have yet to hear an acceptable or uniformly applied definition of “credit crunch”) might be noise on the screen, but people and businesses are still able to borrow cheaply, which is all that counts on an aggregate level.  In order for banks to make money, they need to lend money.  Let’s assume that banks want to make money.  If they lend money at low rates of interest and people are buying things, this component will be fine.
  5. US GDP growth:  In the last quarter, GDP growth was .6%, which, while nothing to write home about, is positive, not negative.  Last year, GDP growth was 2.2%.  Five years ago, it was 2.5%.  The average real rate of GDP growth for the past 50 years has been 3.31%.[5] It is clear that GDP is slipping today, which is not good at all, but real GDP growth is still positive, albeit anemic.  It makes sense that, after almost 10 years of high growth, it might slow down for a short time.  (Keep in mind that the average “recessionary” GDP cycle has been about 11 months, while the average expansionary cycle has been about 4 years.)

So, while the US economy is admittedly slowing, if you use basic and reliable economic data, it seems clear that, despite what you hear daily throughout- almost literally- the entire media world, we are NOT in a recession.  It is more accurate to look at hard data over time in order to gain an overall assessment of the economy. 

Brian Hamilton is the co-founder and CEO of Sageworks, a Raleigh, NC financial analysis technology and research services company that develops software/web-based applications for financial professionals and business owners.  He is a co-developer of “FIND” (Financial Information into Narrative Data),the company’s core artificial intelligence technology which converts financial numbers into plain-language reports.

[1] United States Department of Labor, Bureau of Labor Statistics, www.bls.gov
[2] United States Census Bureau, www.census.gov
[3] InflationData.com
[4] FreddieMac.com
[5] United States Department of Congress, Bureau of Economic Analysis, www.bea.gov

About brian hamilton