The weak August jobs numbers came as a shock — but such news is all too likely to become routine without real change in Washington.
The days before the employment report had brought strong economic reports. There was a solid rise in the Purchasing Managers Index, suggesting growth in manufacturing.
And automotive sales for August were hot. New vehicles sold at a 17.5 million annual clip, the highest month since January 2006, helped by booming sales of luxury cars and pickups.
Yet job gains slowed to 142,000 in August, well below population growth, and the 2.1 percent year-over-year rise in wages was almost completely chewed up by the 2 percent official inflation rate.
The disconnect points to a two-tiered economy, and a lot of cronyism. Those with high incomes or good connections to the government are leveraging up and doing most of the buying and the building. Those below the top are treading water, if they’re lucky.
A 2013 study by the American Affluence Research Center showed that 50 percent of consumer spending is coming from just the top 10 percent of incomes. They’re also doing most of the investing and hiring, and will get most of any gains (or losses) from the high-end boom.
A Sept. 4 Federal Reserve study showed the flip side. Before-tax median family income (the middle of the middle class) fell to $46,700 in 2013, down 5 percent from 2010.
Such a drop is unprecedented at this point in an economic expansion. And that income drop came on top of an 8 percent decline from 2007 to 2010. While the top 10 percent of income earners saw an increase, every other income group saw declines.
It’s a nationwide problem, but it’s exaggerated in New York. Brooklyn is booming for those with money or assets to borrow against, spurring stories of unused warehouses tripling in price.
In Manhattan, Wall Street is getting its share, selling $3.5 trillion in bonds to the Federal Reserve and sharing in record stock prices. But for most New Yorkers, the challenge isn’t finding choice real estate; it’s facing the decline in jobs.
The nurse at my doctor’s appointment on York Avenue explained it bluntly last week: “I came from Eastern Europe 12 years ago. I keep thinking things will improve, but they’ve been getting harder and I’m thinking of going back.”
President Obama’s economic policies bear much responsibility for the declines in middle-class incomes.
There are lots of problems: an abysmally complex tax code, incomprehensible regulation, litigation everywhere and endless increases in government spending, debt and power over the economy.
But another factor is the fast-growing Federal Reserve. The Fed is normally one of the staunchest defenders of free markets, yet has manipulated interest rates to zero for nearly six years and bought one of the world’s biggest bond portfolios for itself.
This hurts savers, distorts markets and puts the Fed at the center of capital allocation — deciding winners and losers almost daily.
And the Fed is drastically expanding its role in three other areas.
- It has decided to keep its $4.5 trillion bond portfolio (bought up in the name of bolstering the shaky post-2008 economy), converting itself into an investment manager.
- It shelters the new Consumer Financial Protection Bureau, in its third year already a major new Washington power center. The CFPB is immune to the checks and balances of the congressional appropriations process, and is even requisitioning its own prime office space a block from the White House.
- And the Fed has become the driving power behind the new Financial Stability Oversight Council, the closed-door Treasury-chaired committee of regulators working to expand government control of the financial industry under the Dodd-Frank law.
The result is that the divisions in credit markets are getting deeper: Well-connected businesses have access to cheap credit; not so, for the small and new businesses that fall below the government’s lending screen.
Indeed, the “little guys” may find their bank still requiring personal guarantees for working-capital loans that used to be automatic, even as credit flows freely to those who don’t really need more — big companies that buy back their stock, financial engineers that churn markets, and governments that over-borrow.
This leaves less income for small savers and less access to credit for small businesses, the best job creators and the part of the economy farthest away from big government.
David Malpass is president of Encima Global, an economic research and consulting firm serving institutional investors and corporate clients.