A follow up on my post concerning the performance of US companies versus the unemployment rate was contained in an article by Neil Reynolds in the Globe and Mail business section on March 30 2011.
Reynolds contends that while certain sectors of the US economy were severly mauled by the great recession the "average" family and the country on the "average" did quite well. For example US disposable income adjusted for inflation fell by a mere $99 in 2009 and it increased in 2010 to an all time record of $33,019. The average net worth of the average American household did not fare as well. Net worth fell sharply n 2007 but is now increasing by $20,000 per household in 2010 restoring net worth to its mid 1990s level. The decrease in household net worth is a direct result of a decrease in the value of Americans' homes but for those who did not sell or were not forced to sell or remortgage this is paper loss. There is strong evidence that a person's home will continue to be a significant part of his or her's net worth.
How badly was domestic per capital Gross Domestic Product hurt during the recession? Not badly at all. In 2000 the per capita GDP was almost $38,000. In 2010 the per capital GDP was almost $43,000. These numbers are adjusted for inflation.
The article goes on to explain that most of the stimulus money was used to pay down debt. Americans who were, during most of the first decade of the millennium, experiencing a negative savings rate (that is they were spending more than they earned) are now saving at a rate of over 5% (as a percentage of disposable income). This takes them back to the 1960's savings rate.
The conclusion of the article is that most Americans are better off this year than they were last year. "The average household is not unemployed. The average household is not homeless. The average household hasn't slipped into poverty". The average household is saving more than at any time since the 1960s.
We know that employment lags recovery after a recession. While employers will spend large amounts of money on machinery, equipment and software that makes their company more efficient, hiring is a human commitment has has far reaching obligations. This is particularly true if the employer is unionized. However, employment can't lag indefinitely. There are jobs that only humans can do. So it appears that the success of corporations is a harbinger of better things to come.
But averages are just averages. There are a great number of Americans that are in distress. There are a large number of people who are homeless and there are a large number of people whose work prospects are dim for the rest of their working (or non-working) lives. The country is experiencing huge deficits and and unparalleled sovereign debt load. The tax system will have to absorb corporation's previous losses before the new found prosperity has any positive effect on tax revenues. The US will have to find a way to transition those in distress to the new prosperity. Some may have to be retrained. Some will have to accept work at lesser salaries than what they were formerly earning. Some may never work again. Some may never own a home again. However, I believe that the US economy, the largest in the world, can absorb these social costs. It will take creative political leadership to achieve this goal. But, I believe that it can be done.
So this may explain further why the Dow is doing so well while the unemployment rate is extremely high. In my last post I indicated that large American corporations were doing well and unemployment has only come down marginally. My post indicated that the cheap dollar was fueling foreign sales. While that is probably true another factor may be that, on the average, the American household is not doing too badly at all. The lines at the Apple store for the iPad2 are a testament to that.
This is extremely good news for Canada whose economy is highly dependent of the American economy.
Bernie.
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