If you were asked by a young person you care for to explain the U.S. economy in one simple sentence, what is your explanation? Allow me to set the stage with a great quote from Walt Whitman,
“Truth is simple. If it were complicated everyone would understand it.”
I promise to give you my best answer, but first we will take a look at some headlines in the news today that many people find confusing. About this time last year I suggested to you to watch company earnings for weakness. Take a look at car sales. It was good while it lasted. The products are better than ever and financing is easy. “But analysts are now casting doubt on whether this year’s sales will match last year’s record of 17.4 million vehicles. And even an incremental decrease in the overall market will heighten pressure on some companies to add more discounts and pare back production of certain models,” submits Bill Vlasic at the New York Times on September 1, 2016. Vlasic notes that the big 2016 decline in U.S. auto sales may signal an end to the six year boom. The car sales slow-down is but one example of an industry that does not paint a pretty picture for future growth.
You can look forward over the next month or so of an onslaught of numbers, reasons, deflections, and promising projections. You will hear many company spokespersons explain why their industry is soft and the good times are just around the next corner. Don’t drink the Kool-Aid. You will be asked to look past the one-time events that seem to happen every quarter, because the core business is healthy. Rather than nodding in agreement with the talking heads, we should simply review the results.
“Trust, but verify.” – President Ronald Regan
According to FactSet, we’re staring down the sixth consecutive quarter of lower year-over-year earnings, Rodney Johnson, Senior Editor, Dent Research submits, “which marks the first time this has happened since FactSet began to track earnings in the third quarter of 2008.”
You remember that last year energy companies were credited with much of the decline. The bad news was supposed to be over when oil rebounded, but the good news isn’t very promising. Johnson said, “Oil is up more than 50% from the end of last year, and yet energy company earnings are expected to fall 63% this quarter,” on October 14, 2016 We saw analysts cut earnings expectations for materials, real estate, and consumer discretionary companies. Meantime, as companies are struggling to make real progress, stock prices are celebrating.
Raoul Pal said the stock market is behaving the way it did back in 2000 in a Yahoo Finance interview on May 16, 2016 and again at the Irrational Economic Summit in Palm Beach, Florida on October 21, 2016. Pal said, “I’m worried that the U.S. economy is weak and the global economy is already weak.” As you can see with this chart, one of the indicators may be an ominous decline in Americans going out to eat.
Stock buybacks skew
Then there’s the impact of stock buybacks. This practice used to occur with failing companies that were anxious to shore up their price earnings ratios by taking shares out of the market. Since 2008, companies have been obsessed with stock buybacks. Rodney Johnson said, “Companies are using their cash stockpiles and debt (courtesy of exceptionally low interest rates) to retire stock by the truckload. In the first quarter of this year, companies in the S&P 500 spent more than $150 billion to buy back their shares. They have spent more than $2 trillion on their own stocks since 2011.” Including dividends, “companies in the S&P 500 have paid investors 112% of what they made in the first half of 2016. To put it mildly, that’s unsustainable.”
Federal Reserve Chair Janet Yellen said, the aftermath of the 2007-09 crisis has “revealed limits in economists’ understanding of the economy,” on October 14, 2016 at the Federal Reserve Bank of Boston. “The slow recovery from the Great Recession has surprised economists, confounding long-held beliefs about growth and inflation. Her remarks could help explain why the Fed has been reluctant to raise U.S. interest rates,” wrote Paul Wiseman, AP Economics Writer, October 14, 2016.
“Understanding the U.S. economy may be as simple as studying
the buying behavior of consumers based on age.” – John Grace
That’s my simple, one sentence explanation that I promised you. Let me explain, thanks to the U.S. Census Bureau and Dent Research 2015. Here are the peaks based on age.
14 peak potato chip consumption
19 average Americans enter the work force
25 when most people move for job opportunities
22-30 young married
31 first home purchases
39 most furniture purchased in life
41-42 the average American Mom buys the most potato chips in life for the 14 year olds
45-46 peak earning and spending for average Americans (note this was 2007, then there was 2008)
53-54 peak earning and spending for affluent Americans who enter the work force later (note this peak was 2015)
54 is the peak for car sales in the U.S.
Now look to the right. It appears to this observer that the spending pattern for Americans past age 65 regardless of income looks a lot like a water fall. According to the U.S. Census Bureau, Baby Boomers next year range from 71 to 53. At the end of the day, nobody will fool Father Time or Mother Nature. Economist Herbert Stein put it this way, “If something cannot go on forever, it will stop.”
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