The Current 'Depression'
Stagnant wages, the "savings rate" and other non-problems.
The Wall Street Journal Editorial Page
Saturday, February 3, 2007
The good economic news keeps rolling in. Yesterday's new-jobs estimate for January, at 110,000, was below Wall Street expectations but it was accompanied by upward revisions of 81,000 jobs for the prior two months. Those revisions brought the 2006 monthly average up to 187,000 new jobs, or 2.2 million for the year.
Readers will recall that the current expansion was derided right through 2004 as a "jobless recovery." We now know the economy has created 7.4 million new jobs since mid-2003, as revisions by the Bureau of Labor Statistics have added hundreds of thousands to its original monthly estimates. Thus the hand-wringers have had no choice but to move on, turning their laments to allegedly "stagnant wages." Well, that's now vanishing too.
Let's look at the record of this expansion compared with that of the sainted 1990s. Economist Michael Darda has been looking at the numbers, and yesterday he put out a side-by-side employment comparison of the first five years of the 1991-2000 expansion with the current one that began in the fourth quarter of 2001.
Between 1991 and 1996, the unemployment rate averaged 6.4%, compared with 5.4% from 2001 to 2006. Today's jobless rate is now down to 4.6%. As for real (inflation-adjusted) wage growth, it averaged 0.6% annually for non-farm workers in the first half of the 1990s compared with 1.5% a year so far in this decade.
"This cycle as a whole has witnessed twice the average
real wage growth than the first 64 months of the previous
expansion," Mr. Darda writes.
For the last 12 months, real wages have risen even faster, at a 1.7% clip.
Anything else to worry about? Well, there's always the "trade deficit," though exports are now booming (up 10% last year), especially to the countries with which the U.S. has signed free-trade agreements. So moving right along, this week's bad news is said to be the U.S. "savings rate," which according to the official measure was "negative" for a whole calendar year for the first time "since the Great Depression," as Martin Crutsinger of the Associated Press helpfully put it. Hooverville, here we come!
As a statistic, however, the official "savings rate" is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, "income" doesn't measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts.
Think about how you calculate your own personal "savings rate." Do you merely add up what you make in salary in a year minus what you spend? Or do you sneak a peak at whether your IRA increased in value, or check the sale price your neighbor got on his home to figure out what you might be able to get for yours? By any normal definition, "savings" should include your increase in total assets--in other words, your gains in overall wealth.
For our part, these columns long ago began to watch a far more instructive figure known as "household net worth." That number, released by the Federal Reserve, includes all assets (tangible and financial) held by individuals less their liabilities (mortgage and other debt). At the end of last year's third quarter, U.S. household net worth had climbed to $54.1 trillion. That was an increase of more than $3 trillion over the previous four quarters. Rest assured, that's a much higher figure than during "the Great Depression," AP notwithstanding.
None of this means we should be complacent about economic growth. There are two genuine clouds on the horizon--namely, inflation risk and political risk. Inflation remains somewhat higher than is comfortable, and we still expect the Fed will consider further interest-rate hikes if today's weak dollar and soaring commodity prices lead to a jump in the official inflation indicators later this year. As for politics, the Democrats now running Congress explicitly reject the tax cuts and freer trade that have helped to propel the current prosperity. If history is any guide, sooner or later this is a recipe for trouble.
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