US Economic Fundamentals are not Strong
Some people think the United States economy is doing well. The unemployment rate is low. Major US stock indices continue to rise.. There has not been hyperinflation of consumer prices.
So one might be tempted to think the economy is doing pretty well and everything is good and normal. I don’t think this is accurate but I think it is important to look at some of the measures that do seem to support the view that the US economy is on strong ground.
The following are some facts that people will point to when they say that everything is fine.
Stocks are Up
US Stock investors have been handsomely rewarded since the lows of the 2008 financial crisis.
Led by darlings such as Apple, Alphabet (Google), and Amazon, the NASDAQ composite has reached new all-time highs.
The S&P 500 has been on a tear, also making new highs without any significant corrections.
The Dow Jones Industrial average is also making new highs.
The Dollar is Relatively Strong
Despite unprecedented central bank intervention and record US debt the US Dollar Index is holding.
US GDP Continues to Rise
United States Gross Domestic Product continues to climb.
The unemployment rate is below 5%.
But if you look a little deeper than the headlines there are systemic problems in the United States economy.
A lot of People Aren’t Working
Labor Force Participation is at levels not seen since the 70s. And no, it’s not because of baby boomer’s retiring. Labor force participation from those age 25-54 has dropped from 82.8% in 2004 down to 80.9% in 2014. Participation from those age 65 and older has increased from 14.4% in 2004 up to 18.6% in 2014. Source: https://www.bls.gov/emp/ep_table_303.htm
Just because the unemployment rate is low doesn’t mean people aren’t unemployed. If someone is unemployed for long enough, they simply drop off. If someone is fired from a good paying salaried position, and they get two new part time jobs, that is considered a net job gain.
United States GDP Growth is Slowing
The growth rate of US GDP has been trending down.
US Debt is Growing
US National debt is up to nearly $20 trillion, not counting the unfunded liabilities of Social Security and Medicare. Source:
It is politically impossible to cut spending. As Simon Black recently pointed out:
In 2016, for example, the government spent $2.87 trillion on Defense, Social Security, and Medicare, plus an additional $433 billion paying interest on the debt.
That totals over $3.3 trillion, which is more than they collected in tax revenue.
In other words all spending on the department of energy, education, homeland security, everything else besides defense, social security and medicare could be cut completely and there would still be a budget shortfall.
I believe it is politically impossible to cut social security, medicare or defense spending in the United States.
The Debt to GDP is Rising
The debt to GDP ratio is at levels not seen since the United States was fighting a World War in the 40s. Source: https://en.wikipedia.org/wiki/File:Public_debt_percent_of_GDP.pdf
State Pension Funds are Underfunded
The majority of State Pension funds are underfunded.
Social Security and Medicare are Underfunded
This isn’t some alarmist drivel. The people in charge of the Social Security and Medicare Trust Funds are issuing statements like following:
“Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing.”
As well as statements like:
Under the intermediate assumptions, DI Trust Fund asset reserves are projected to become depleted in the third quarter of 2023, at which time continuing income to the DI Trust Fund would be sufficient to pay 89 percent of DI
scheduled benefits. Therefore, legislative action is needed soon to address
the DI program’s financial imbalance. The OASI Trust Fund reserves are
projected to become depleted in 2035, at which time OASI income would be
sufficient to pay 77 percent of OASI scheduled benefits.
I haven’t even touched on consumer debt, state debt, low home ownership, and low savings per capita.
The US Economy isn’t Fine
So despite headlines like the low unemployment rate and stock markets making new highs that seem to indicate a recovery from the 2008 financial crisis there are systemic issues in the US economic system. I don’t think that the United States will be able to continue to borrow and spend without consequences. The fact as the United States has a printing press and the world reserve currency doesn’t mean it can borrow and spend forever.
There are ways to protect yourself but you have to be aware of the problems.