The meaning of the 2014 midterm US elections
The US mid-term elections have just ended as a major victory for the Republican Party. And while I don’t do politics, being in DC affords me a front row seat to what’s going on. Below is my take on what happened, why and what it means for the economy.
The mid-term election cycle was, more than anything, a referendum on President Barack Obama. And he lost this referendum decisively because of voter apathy and low wage growth. The result will be divided government, with a likely tilt toward a more ‘corporatist’ governing approach, which will likely be negative for wage earners, and ultimately may reduce consumption growth as a result.
When I look at the macro aggregates for the United States that people care about or say are a good thing, they all look stellar. Here’s a brief list:
- The 4-week moving average for seasonally adjusted jobless claims are at 281,000, which is the lowest level since 2000
- US job openings as measured in the Labor Department’s Job Openings and Labor Turnover survey are 4.84 million, the highest since 2001
- The unemployment rate in the U.S. is 5.9%, the lowest since 2008
- The last 6 months of GDP growth at 4.6% and 3.5% for Q2 and Q3 2014 respectively are the highest combined growth since 2004
So we are seeing lower unemployment, fewer layoffs, more job availability and higher growth across the board. And there are numerous other macro data points that corroborate the upbeat view that these data give.
But when you ask people how the economy is doing, they say it’s not doing well. For example, CNBC’s economic survey from last month revealed the following:
Just 24 percent of Americans say they are extremely or quite confident in Obama’s economic policies and goals, down from 33 percent when the question was last asked in June 2013, the previous low-point of the Obama presidency. And 44 percent of the public say they have no confidence at all in the president on the economy, tied with the prior low in August 2012. (Prior surveys were conducted by the NBC/Wall Street Journal).
The CNBC survey found the president’s economic leadership lacking majority support of every single demographic group, including only 45 percent of Democrats saying they are extremely or quite confident in the president when it comes to the economy. Even those doing best in the economy have muted views of the president.
The only political saving grace for the president ahead of next month’s midterm elections is that Republicans in Congress rate worse. Just 11 percent of those polled say they are extremely or quite confident in Republican policies, compared with 16 percent for congressional Democrats.
Still, the numbers show a disconnect between the economic data and economic views of the president. Obama’s support on the economy is 15 percentage points lower now than it was in August 2010, when the unemployment rate was 9.5 percent compared with just 5.9 percent now.
The CNBC survey shows slightly better views on the economy overall compared to a year ago, with 79 percent now judging the economy as fair or poor, down 5 points from a year ago. Those rating the economy as excellent or good rose 3 points. Those are depressed levels compare to a year ago, but they underscore how Americans’ views on the economy are going one way while their views on Obama go in the other direction.
So, the U.S. in the fifth year of an economic expansion and the numbers are the best they have been yet. But 79% of the electorate believe the economy is poor or fair. That’s an amazing indictment of the President’s economic leadership. Now, if you asked Democrats why there is this disconnect, they would tell you something about messaging. Last night as I watched the mid-terms with some friends, one friend close to the Obama Administration made noises to this effect. But, in my view, this is not about messaging at all. There is a deep-seated sense of dissatisfaction that spans both major political parties and independents suggesting that the headline numbers do not adequately reflect the real economy.
In my cursory look yesterday at labor cost data, I found that during this expansion wages and benefits have only expanded some 1.5-2.0% consistently year after year. Looking back at data to the mid-1980’s, I also found that nominal compensation in wages and benefits increased every year by 3-5%. Now, some of the discrepancy is due to the lowflation environment. But even after inflation, we are talking about no wage growth in the US since 2009, when the technical recovery began. Moreover, like it or not, nominal gains count for a lot, even when they are diminished by inflation. People used to 3-5% increases don’t like getting have that amount, irrespective of whether the CPI is decreasing.
So, my view here is that what we are seeing is a recovery that has been the slowest in post-World War II history on the jobs front and that still suffers from inadequate nominal and real wage growth. Combine this with other social or political issues and you get low voter turnout, a dispirited Democratic base and sweeping victories for the Republican Party.
What this means in terms of US governance is that the Republicans can push their pro-business agenda, which ironically, will not have any short-term benefits for voters disaffected by low wage growth. What I am hearing is that Republicans plan to go heavy on tax reform as an issue, which will probably mean a repatriation tax break and/or lower corporate taxes in one form or another. Right now, wage growth is low despite record profits and record high profit margins on an aggregate scale in American business. So what we have seen during this recovery then is U.S. business investment and hiring restraint such that the lion’s share of gains from productivity have accrued to shareholders and little has accrued to wage earners. Add in the leveraging of corporate balance sheets and share buybacks, and you can see why shares have done well in this low discount rate environment.
Going forward, however, unless the economic environment weakens, rates will be under pressure as will margins. And U.S. Business may find consumer demand weakening unless some of the increase in the economy flows through into wage growth that will support consumer spending. I still believe we are in a 2%ish paradigm for growth and are likely to see some growth giveback in the quarters ahead as Q2 and Q3 were above that trend.