Jewish World Review July 30, 2002 /21 Menachem-Av, 5762
http://www.NewsAndOpinion.com | An investor looks out the window of his broker's office and is horrified to see other investors poised to jump off building ledges up and down Wall Street. His broker explains: "Every now and then we have to look at the leading technical indicators in the market." Nothing like a little gallows humor.
But seriously, folks, as the stand-up guys like to say, it is actually worth considering some of the technical factors influencing the country's economic health. Besides the financial economy, which has garnered all the headlines of late, there is the real economy. American households are hurting because of the stock market's wild ride, but it's the real economy that generates the income a family must live on. So the question becomes: What will the market do to consumer, business, and government spending, the fulcrum points for moving forward?
More than 80 million Americans own stocks either directly or through mutual funds or pension plans. They have lost $7 trillion since the market peaked. Their anxiety comes from the destruction of five years of wealth accumulation, which is particularly hard on the retired or nearly retired.
For the typical consumer, however, housing is four times more important than equities, and home values have been going up while mortgage rates have been going down-permitting the refinancing of homes to raise money ($80 billion last year) for American households while lowering mortgage carrying costs. And remember that 68 percent of America's families own homes, far more than the percentage that own stocks.
Better prospects. More often than not, rising job pros-pects offset discontent over plunging stock markets. The unemployment rate is still under 6 percent, and new claims for unemployment benefits suggest that joblessness will remain below that. Want more good news? Real weekly paychecks are growing by about 4 percent, thanks in part to President Bush's tax cut. So you're looking at a formula that, absent some monster economic shock, should continue to prop up consumer spending.
So far, so good. But then there's the psychology factor. To date, this has been a jobless recovery. Why? The economy is growing too slowly while productivity is growing too quickly to make much of a dent in the unemployment rate. In such a scenario, each job lost could mean a new job may be unavailable. Consumers worry that falling stock prices may mean still more job cuts. So they begin to curb spending and save. The current savings rate is only about 3 percent of income, relatively low. If this climbs to a normal 6 percent or 7 percent level, growth might be depressed well into next year. Payments, wages, and salaries are about eight times the level of pretax earnings.
A single percentage-point drop in wage growth, in other words, all other things being equal, translates into an increase of 8 percentage points in earnings growth. So it's not hard to see why companies trying to rebuild profits will remain tightfisted about wage increases. After all, pretax profits, as a share of gross domestic product for nonfinancial corporations, increased to 5 percent from 3 percent in 2001-but this is still well below usual rates and only half of the nearly 10 percent of 1997. Discipline in corporate costs is the only way companies can improve their bottom lines.
Beyond that, the weak stock market guarantees deficits for state and local governments, since they are uniquely dependent on consumer purchases by higher-income families and capital-gains taxes. California's revenues from capital gains and stock options last year dropped a staggering 62 percent. The state may now face a deficit of over $23 billion. New York City and New York State combined will have deficits in the range of $10 billion; 45 of the other 48 states face deficits next year, so they'll be cutting public works, programs, and jobs.
What is to be done? The federal government has gotten back into deficits, and the Federal Reserve has cut interest rates to the lowest levels in decades. This is not nearly enough. So here are four ideas: First, the United States should embark on a one- or two-year program to aid distressed states so they can avoid cuts in employment, public-works spending, and essential programs. Alternatively, Washington could offer federal guarantees to help states and cities through bond financing that might otherwise be unavailable because of their deficits. Second, the Fed must cut interest rates more-now. This is no time for the Fed governors to keep their powder dry. Third, Congress must support trade-promotion authority for the president so that we can expand exports. Lastly, President Bush must move more convincingly to restore confidence in the way business is run. The federal government must ensure accuracy and fairness in our financial markets.
Action is critical; the sooner, the better.
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