The Rise of a “New America:” Different Economic Realities for Different Political Parties
Americans are employed and wages are rising but so are prices. Many hard working folks are therefore watching (or worried about) their standards of living being eroded.
Despite the lecturing tone (and misleading statistics) used by some of the commentariat, this isn't just in our imaginations.
Here are real wages or wages minus the rate of inflation:
Rising prices and falling living standards - though just beginning - is already leading to changes in how the US economy and society functions. You see this all over the place and frequently discussed in the editions of this newsletter:
Rising house prices and rents.
Many industries and job markets unable to find or retain staff.
Other companies forced to either raise prices or lower their margins.
But there is a deeper transformation occurring as well.
Here is a very insightful chart on the current situation in the US right now - and across the Western world.
There are two lines that have typically followed each other very closely:
The yellow line is the Conference Board's Labor Differential index, which represents US workers' confidence in the job market. It is at an all time high.
The white line represents consumers overall confidence in the economy. It is a good proxy for how positive people are feeling about their working lives and the direction of the country.
The latter is moving sharply lower:
As you can see, normally, these lines move in near lockstep.
Which makes sense.
Traditionally, if you had a job and were able to make ends meet you likely at least feeling okay about the economy and if you believed you could advance or do better then you might even feel positive.
Today is quite different.
Many people have jobs. There are also many job opportunities - and hiring bonuses and higher wages! - for those looking.
Finding a job, even a good well paid job is no longer the issue.
However, there are a host of other problems:
The pandemic has revealed the hidden danger and difficulties of doing a lot of jobs. Firefighters sign up for personal danger, daycare workers and waiters do not.
There is also the inflation we have covered frequently, including today. If the likes of food and gas are rising and also volatile then people may be employed but they are watching their bills march upwards and so they feel poorer despite working hard.
The latest CPI print is telling. The single largest component was gasoline. The second was shelter, broadly defined (see chart).
Unsurprisingly, house prices (and apartment rents) are another related source of anxiety. If the cost of your shelter is leaping ahead of your salary then no amount of job will make it better. Housing insecure might be the only threat that gives job insecurity a run for its money.
The other big takeaway might be a little squishier and that is that, for most Americans, the health of the economy used to be defined by its job market. That is clearly no longer the case.
Having a job - even a good job - doesn't necessarily mean you can feel secure, let alone comfortable.
As we have stated before, this divergence is a real challenge for the current Biden Presidency and the smooth functioning of his administration.
If you want a lead on the midterms or simply to understand why President Biden's approval is so low (43%) when the economy is doing well, this chart is a good place to start.
The flipside of this situation is that if this divergence closes then suddenly a lot of issues could resolve themselves, not just politically but also economically.
That is clearly what the Fed is banking on (and praying for?). Higher growth and fewer "transitory" one offs could leave the economy - and also regular Americans in a great spot.
In other words, there may not be much of a silver lining to this week's inflation print but if this divergence could close in 2022 then that could suddenly leave us with a strong job market and a quickly growing economy.
This would obviously be great and has to be President's Biden overarching goal for 2022. For now, however, everything is pretty messy and the political situation is getting fraught.
This high inflation combined with low approval ratings - and the recent real losses in Virginia and elsewhere - will be raising the pressure on both elected politicians like President Biden and his team as well as independent policymakers like Jay Powell and the FOMC.
The latter especially will be very conscious of not making a hasty mistake that creates more economic problems than it solves.
Taking a step back, this chart bears watching and thinking about in the months and years ahead. If a key driver for how the American economy is behaving very differently from normal then it is very likely to have an impact on life around us.
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