A common refrain heard among pundits is that the Fed’s QE stimulus program has done little, if anything, to boost the economy.
No one denies the extent to which QE has sent stock prices soaring in the last five years, yet in that same amount of time the domestic economy has made but scant progress. Or so goes the cliché. There is good reason for believing, however, that the economy has seen more internal improvement than critics would like to admit.
So just how much as QE helped the economy? A recent report by the McKinsey Global Institute, as mentioned in the Momentum Strategies Report, estimated that “unconventional monetary policies” such as asset purchases and low interest rates have reduced the unemployment rate by at least 1 percent and have prevented a deflationary spiral in the U.S.
Consumer confidence, while certainly below the high levels of the pre-crisis years, has come a long way since the depths of 2009. It reflects a steady improvement in how consumers perceive their own economic prospects and is a testament of recovery.
Another clear testament of economic recovery is the New Economy Index (NEI), a reflection of the real-time state of the U.S. retail economy. NEI recently hit a new all-time high and continues trending higher. As long-time readers of this column are aware, until NEI confirms a “sell” signal the overall trend of retail spending is considered to be up. The last time NEI gave a “sell” signal was in early 2010, which proved to be a temporary blip in the long-term recover that started in 2009.
There are many who wonder why, with untold billions in stimulus money, the economy hasn’t recovered more than it has by now. There are three answers to this; the first answer is that given the severity of the 2008 credit crash it was only natural that recovery would be prolonged. After all, the previous Great Depression in the 1930s took over a decade to get the economy moving again. This time around the unprecedented scope and pace of the Fed’s stimulus shortened the depth of the recession and improved the recovery time.
The second answer is that the 60year/120-year Kress cycle has been in its final “hard down” phase for the last few years. This has created a deflationary undercurrent in the U.S. economy; it partly explains why the Fed can get away with creating so much money every month without it leading to massive inflation, as it would normally.
A third and more revealing answer is that the consumer spending component of the recovery has actually done better than the statistics suggest. Raymond James economist Jeffrey Saut discussed this in a recent commentary, noting that “the majority of [consumer] transactions are taking place for cash, where sales are not as readily captured in the surface figure as are credit-card purchases. Indeed, not only are the foreigners transacting in cash, but many Americans are doing the same after having been burned by debt in the 2008-09 credit crisis.” Saut’s conclusion is that the economy is stronger than most believe.
This isn’t the complete story, however. Most of the increased spending and subsequent economic strength is courtesy of upper-middle class and wealthy consumers. The middle class still hasn’t fully recovered from the Great Recession, and there is some evidence that segments of the middle class are still experiencing something akin to a recession. The way a recovery normally progresses is that the wealthier segments of the population are the first to emerge from an economic contraction with increased spending. Then the classes beneath them slowly start spending again as the job market improves and with it their fortunes.
It’s clear that the U.S. middle class has yet to fully participate in the recovery, but their participation should be evident by 2015 once the deflationary undercurrents of the Kress cycle have been dissipated.