2000. The Year We Lost Contact.

December 3, 2019

One thing that has been percolating in my mind for some time is the similarity in certain economic trends that I keep running into. What brought this to mind yet again was a remarkable series of charts produced by an anonymous account on Twitter, from a self described buy side analyst. The anonymity shouldn't undermine his work. Some of the best #EconTwitter accounts are run by people who don't use their real names, although a few people know who they are. 

 

 

It started with this chart, breaking out the "Share of Total Net Worth" by Wealth Percentile. You'll note that until the year 2000 or so, the percentiles are well clustered. After that, there is a steep and prolonged divergence, and then, on top of that, we hit the pavement in 2008. The bottom 50% have really suffered an ongoing erosion.

 

 

 

Now let's take the Bottom 50% cohort and overlay the Employment to Population Ratio for the age 25-54 cohort. Erosion for EPOP begins in 2000, we retrace a piece of it by 2007. Note that Net Worth is still declining in 2006-2007 even as EPOP inches up. As with the other charts, we hit the Great Recession and everything rolls off the table altogether. While both EPOP and Net Worth have retraced to the pre-crisis level, this is still unsatisfactory. We're nowhere near the 2000 levels.

 

 

 

Now, manufacturing employment. Looks familiar.

 

 

 

 

While I can't extrapolate any direct correlation to the above, the Labor Force Participation Rate for the age 16-19 cohort follows the same script. It could be tied to the loss of manufacturing jobs, the record high rate of the number of high school graduations, a surge of enlistment after 9/11, or a combination of many individual factors. But this trendline is right in step with the others. One thing unique to this metric is that it never recovers, even a decade after the financial crisis.

 

 

 

Before anyone goes full nutjob on Labor Force Participation, note that the age 16-19 cohort (RED) is the ONLY one that suffers any real and lasting damage during this time period. The 55 and over set actually increased from 2000-2008, which underscores the point I've made for years that this statistic is really driven by demographic trends that overwhelm everything else.

 

So, what to make of all this? Well, ONE thing is abundantly clear: after 2008, we were actually trying to correct for the effects of TWO recessions, the first one moving in slow motion, and the next one redlined. This puts relief efforts in a new context: it shows that while Federal attempts to quickly rectify the massive convulsions of the Great Financial Crisis were the focus, the underlying structural issues still have not been addressed. A slow and steady rot was infecting the economy after 2000, and nothing was done to arrest it. When the hammer fell in 2008 when the banking system collapsed, it opened huge fissures in the underlying economy that remain unaddressed.

 

After 10 years, we have, on several metrics, only retraced to pre-crisis levels. Which is to say, that's really not that good. So while people focus on simply "juicing" the economy, the old saw about "pushing on a string" comes to mind.

 

There is a lot we can unpack here from these charts alone, and the thread produced by the analyst goes further to state that at this stage of our economic "progress," there is almost no point in using economic statistics in the aggregate. As an example, we could point with some satisfaction to the deleveraged household balance sheet, post-crisis. While this is true in the aggregate and for several types of debt obligations, consumer credit exposure by the lower economic deciles is beginning to look stretched. The same goes for wage growth. Almost all of it in the past 20 years has been concentrated in the top quintile. Tax policy, along with the rising costs of health care and shelter continue to exacerbate these trends.

 

The next 10 years will present another set of tests for the American economy, and they won't be finessed by what we're being led to focus on now.

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Donald R. Davret, Investment Advisor Representative

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