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.
