The economy contracted 0.2% in the first quarter, based on the latest revision released last Wednesday. But as we know, a number of temporary factors including another harsh winter, the west coast port strike, and of course the stronger dollar, tarnished economic growth.
With those concerns largely out of the way, many leading indicators are signaling a resumption of the current ~2% growth that we’ve been seeing since the recession ended (see chart below).
The housing sector is rebounding, consumer spending is rising, household formation is growing, and labor conditions are improving.
These and other factors, namely high stock prices and rising real estate values, have resulted in American household wealth hitting another record high of .9 trillion in the first quarter of 2015. This may sound encouraging, but there are some caveats to keep in mind.
First, these figures do not take inflation into account. They are also not adjusted for population growth. Finally, and perhaps most importantly, the wealth gap in America is also near record levels.
Even Janet Yellen has acknowledged the problem with wealth inequality, saying, “By some estimates, income and wealth inequality are near their highest levels in the past hundred years.” She continued, “I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.”
[Hear: Charles Hugh Smith: Wealth Inequality by the Fed Now Mainstream Issue]
The wealth gap presents a very real danger moving forward. It makes moving up the income ladder more difficult, and it reduces the operational flow of the economy since the wealthy shield most of their income from taxes and don’t increase spending as their wealth rises. All the while those at the lower end of the spectrum can barely afford ongoing living expenses.
In my experience the severe wealth gap underpins a critical misinterpretation of our economy. In speaking with friends and colleagues, I hear many people claim that we are still in recession. From an economics perspective, it’s very difficult for me to agree with this statement, but I absolutely understand where they are coming from.
An individual’s view of the economy is primarily driven by his own circumstances, wealth, and prosperity, and that of his family and close friends. We generally take the microcosm of our own lives and extrapolate this out to the condition of the broader economy. It’s completely natural for someone who is earning low wages or still contemplating reentering the workforce to believe the economy is in recession. I understand this and have harbored similar feelings at times.
But I believe that if we look at the data, the culprit of the plight of many Americans is not the result of an economy in recession, but of the tremendous wealth gap.
[Read: Inside the Market's Mind: Productivity, Growth and In(ter)ventions]
Our economy is arguably more prosperous now than it has ever been. There are many data points to support this. As I mentioned, American net worth is at a record high. Gross Domestic Product, the total value of goods and services our nation produces, is also at a record level. Corporate profits are at all-time highs. The total number of nonfarm jobs, representing approximately 80% of the workers who contribute to GDP, is at an all-time high. The list goes on. Unfortunately, however, the wealth gap is also at record levels.
There is tremendous wealth within our economy, it’s just held by a select few, and not productively distributed across the population. That’s a very different problem, with very different solutions, than having an economy that’s in recession.
It’s also not just a US problem. The chart below, created by the Organization of Economic Cooperation and Development (OECD), shows the 10 countries with the worst income inequality.
The OECD summarizes the contrast between economic growth and a widening wealth gap very well:
In recent decades, as much as 40% of the population at the lower end of the distribution has benefited little from economic growth in many countries. In some cases, low earners have even seen their incomes fall in real terms. When such a large group of the population gains so little from economic growth, the social fabric frays and trust in institutions is weakened.
If an individual doesn’t personally benefit from economic growth, he is likely to think that economic growth doesn’t exist, especially if he is not in-tune with ongoing economic performance.
Our economy has problems, lots of them. But are we in recession? No. The unfortunate reality is that for many, this period of mild economic expansion feels very much like a period of economic contraction, because they are not participating in the wealth creation.
[Read also: The Tried-and-True Blueprint for Raising Taxes]
Rising income inequality can also be detrimental to overall economic growth. The OECD addresses this, saying, “High and often growing inequality raises major economic concerns, not just for the low earners themselves but for the wider health and sustainability of our economies … Put simply: rising inequality is bad for long-term growth.”
Collectively, we must become better at distinguishing what plagues our economy. To mistake the symptoms of a serious wealth gap for economic recession is to misallocate our frustration, energy and solutions. I don’t know what the answer is, but I believe that a better widespread understanding of the situation is the first step in addressing it.
Regarding addressing the issue of wealth inequality, I found the results of a recent Washington Post/ABC poll interesting.
They asked voters, “Do you think the federal government should or should not pursue policies that try to reduce the gap between wealthy and less well-off Americans?”
These were the results. Infer what you like.
The preceding content was an excerpt from Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
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