Tale of Two Streets
Once again, we are coming face to face with a simple reality: Wall Street and Main Street sometimes operate in parallel universes.
Once again, we are coming face to face with a simple reality: Wall Street and Main Street sometimes operate in parallel universes.
We saw that recently when the huge December employment report was released even as equity prices were cratering. Though the equity markets have started off the year as badly as they ever have, the U.S. continues to expand solidly, and as long as the equity markets don't melt down, the economy could even accelerate this year.
Growth in the last quarter of 2015 was probably somewhat disappointing, but the headline number may not tell the whole story.
Take the labor market - and I don't mean in a Rodney Dangerfield kind of way. The economy added 292,000 new jobs in December, and for all of 2015 total payrolls were up 2.9 million. That's the largest rise since 1999.
It is most critical that the gains were spread across most sectors. The only really weak link in this hiring binge was the energy sector, where payrolls dropped a whopping 130,000.
The strong gain in hiring didn't lead to a fall in the unemployment rate in December. However, over the year, the rate declined from 5.6 percent to 5 percent, and the number of unemployed shrank by 800,000. With job openings at record highs and unemployment claims at record lows, it's clear that the labor market has firmed significantly.
With jobs more plentiful, consumers decided it was time to spend money. A record number of motor vehicles were sold last year; new-home sales were up by double digits, and existing sales rose solidly. Households willingly took out a lot of loans to pay for those vehicles and houses.
And when we weren't buying homes and SUVs, we hit the malls and the Internet. Retail sales, adjusted for the decline in gasoline prices, increased solidly, as well. The services sector boomed as a result.
Yet there were some weak areas, which is why the equity markets went nowhere. With energy prices collapsing, that sector is having massive problems. Capital spending largely disappeared, restraining overall growth greatly. But modest reductions in output meant costs were high and income was low. Energy-sector corporate losses were great. Is there any question why their stock prices collapsed?
The problems in the oil patch spread to other sectors. Companies that supply machinery, equipment, and services to the energy companies saw their orders dry up. Their earnings fell, and so did their stock prices.
There was also the negative impact of the rising dollar and slowing world growth on U.S. manufacturers. Our goods are more expensive overseas, and exports have slowed. Low energy prices, the high value of the dollar, and weaker foreign economies brought growth in manufacturing to a halt, which further stressed equity markets.
Not only did the rising dollar restrain exports, it hurt earnings - and thus stock prices - in a second way. When the dollar appreciates, profits made outside the country are worth less in terms of dollars. Yes, that is an accounting issue that has little to do with U.S. economic activity, but when investors see earnings fall, stocks get punished.
So let's take stock of the competing issues: The economy grew decently last year, and, as a result, Main Street did OK. And it should do even better this year. The tightening labor markets mean that household wages should grow faster.
The low gasoline and utility costs translate into more money in households' pockets. More income means more spending, growth, and hiring. Even if the Fed raises interest rates, housing and vehicle sales should be strong given the improving household balance sheets.
Meanwhile, declining equity prices may worry people, but if workers keep getting raises, they will continue to spend. As for the low energy prices, which had such a negative impact on growth in 2015, which do you think is better for the economy in the long run: gasoline at $2 a gallon or $4? I will take the $2 anytime. And if the stronger dollar means the cost of imported goods stays down, that's not bad for consumers, either.
Wall Street may continue singing the blues for a while, but Main Street is likely to do better this year.