Signs of a Structural Change in the US Economy

We had the privilege, a few days ago, of speaking with Dr. Lacy Hunt of Hoisington Investment Management on the topic of structural change in the US economy. In his most recent Quarterly Review and Outlook, he argues for depressed GDP growth for twenty years or more due to the high levels of debt in the US (see our discussion of his letter in The Policy of Doom). This we suggest represents a structural change.

Motivated by Dr. Hunt’s writing, we analyzed Chairman Bernanke’s Jackson Hole speech in The Hole in Jackson Hole. We suggested that both employment (Figure 6) and GDP (Figure 4) have recovered to trend and have little room for improvement from this point on. Furthermore we argued that these trends represent a structural shift and not a cyclical correction. In our conversation, Lacy suggested that we were on “the right track”.

Apart from discussing what we had previously written, Dr. Hunt suggested a number of aspects of the US economy that point to a structural shift. These we review briefly below.

The Employment to Population Ratio

Lacy says this ratio (EMRATIO) is purest representation of the employment situation in the US given the complexity and shifts in the definitions for unemployment and its components. Figure 1 shows the ratio for the last 65 years in comparison to the Effective Federal Funds Rate (FEDFUNDS).

Figure 1. EMRATIO and FEDFUNDS. (Click on the image to open in a new window)

We note a steady growth in employment from the early 1950s to about 2000 with the losses from the recessions in this period being fully recovered. Recovery from the 2001 recession was not full and recovery from the latest recession low non-existent. We suggest that the growth from the low of the early 1970s recessions was induced by the Fed’s steady reduction of the funds rate towards zero creating an employment bubble that is now being corrected. The implication would be a structural increase in employment that began in the early 1970s and is now being corrected with a structural decrease. The role of Fed policy in this deserves to be investigated.

We suggest that the above data reinforces our earlier (Jackson Hole) discussion on structural changes in employment.

Societal Changes

The changes in employment are reflected in other parts of the social fabric.

 Food Stamps

In the current economic ‘recovery’ we have a record number of Americans depending on food stamps for survival. We suggest that these replace the soup kitchens of the Great Depression.

Figure 2. The number of Americans on food stamps. (Click on the image to open in a new window)

As of June 2012, the total is 46.7 million (Matt Trivisonno’s Blog).

Poverty Statistics

The 2010 census, Income, Poverty, and Health Insurance Coverage in the United States: 2010, shows 15.1 % of Americans living in poverty, including 22.0% of children and youth up to 18 years.

Figure 3. The number of Americans and the percentage of the population below the poverty line. (Click on the image to open in a new window)

Both rates fell in 2011 by 0.1%. While remaining at the highest points since 1965, the absolute numbers are at a record high corresponding to the number of people on food stamps. Or consider the number of Americans receiving some form of welfare as shown in Figure 3a.

Figure 3a. The number of Americans receiving some form of welfare.

Persons Not Paying Any Income Tax

While the number is relatively easy to determine, the meaning of it needs a bit of commentary. From the New York Times in June 2011 in an article titled Who Doesn’t Pay Federal Income Taxes (Legally), we find 46.4% of Americans did not pay Federal Income Tax. While the number includes most of people living in poverty, it also includes 1.9% of those earning above $103,000.

We didn’t find historical data for this item, but we would expect the numbers to remain elevated supported by the poverty rate.

Persons on Disability

According to the U.S. Social Security Administration, from their webpage Program Cost and Size, there has been a sharp increase in the numbers of people receiving Social Security disability benefits.

Figure 4. The number of people and the number of workers on disability. (Click on the image to open in a new window)

Disability claims move individuals from the pool of potential income earners to the pool of those receiving social assistance benefits, not a positive trend for the economy.

Other Stuff

Dr. Hunt did cover other areas that signify a deterioration in the economic outlook for the US that would appear to be structural. We think Lacy referred to it as the “rusting out” of American society. We were scrambling to take the few notes that we did. We are preparing another piece on trends in employment that support the material above but includes such items as:

  • an increase in temporary versus permanent jobs;
  • an increase in the use of robotics in manufacturing;
  • an increase in service jobs versus manufacturing jobs and a deterioration in the quality of such jobs;
  • the use of part-time employment to bypass requirements to pay benefits;
  • the crisis in public sector jobs with unsustainable benefit and pay levels.

Summary Comment

We would argue that the many issues and associated trends mentioned above represent a structural change in the US economy and US society that will not be easily reversed. Elsewhere we have argued that it may take 20 years or more for real economic recovery to occur. We believe the data discussed above supports that view.

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