Our ‘Trickle Down’ Recovery

Popular Economics Weekly

Even though so-called ‘trickle-down’ economics that was popularized as Reaganomics in the 1980s has lost popularity—it was deregulation that caused the credit markets to go wild, after all—some vestiges are still evident in the current recovery. And that is because most of the stimulus aid has gone to Wall Street—both as TARP funds and the $2 trillion spent by the Federal Reserve to keep down interest rates—with the hope it would trickle down to Main Street.

To date, it is the banks that have benefited most from those low rates. Their profit margins have increased, since they are able to borrow at almost zero cost while lending at prevailing retail rates. But the merest trickle is getting to consumers and small businesses, and so Main Street.

The most recent evidence is the Federal Reserve’s monthly Consumer Credit report. Credit for both credit cards and installments debts—excluding mortgages—shrank 4.4 percent in 2009, the largest amount since records were kept. Borrowing for cars and other goods that require installment debt have grown slightly, but revolving debt has now shrunk to 2005 levels, indicating that more credit cards are being cancelled than originated.

The incentive-driven surge of car sales in March by dealers made for what is actually a welcome increase in outstanding consumer credit, up $2.0 billion vs. a $6.2 billion contraction in February. Even the news on February is a little better as the contraction was revised upward to minus $6.2 billion from an initial reading of minus $11.5 billion. March non-revolving credit, reflecting car sales, jumped $5.2 billion to offset another contraction in revolving credit, this time minus $3.2 billion. The contraction in non-revolving credit is a reminder that consumer confidence, despite an improving jobs market, is less than spirited.

Corporations are another sector that has benefited from the stimulus aid. Low interest rates have kept down their borrowing costs, amid soaring profits. Yet they have barely begun to hire, after shedding more than 8 million jobs during the recession.

Corporate profits in the fourth quarter surged to an annualized $1.270 trillion from $1.174 trillion the prior quarter, said the Commerce Dept. Profits in the fourth quarter were up an annualized 37.0 percent, following a 68.0 percent jump the prior quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are up 51.8 percent on a year-on-year basis.

Unemployment remains stubbornly high compared to past recessions, as we said last week. Payroll jobs in April grew a healthy 290,000, following a revised 230,000 advance in March, and 39,000 rise in February. Net combined revisions for March and February were up a 121,000—including turning February from negative to positive. Payrolls have risen for four consecutive months and in five of the last six. And April’s boost was the largest in four years.

It’s hard to argue that we are still in recession with this string of gains. But the gains to date are mostly on Wall Street. Corporations have profited as much from cutting their overhead, including worker layoffs.

Consumers don’t feel they are sharing in it yet, as evidenced by consumer sentiment. But maybe the improving jobs market will change attitudes.

The Conference Board's consumer confidence report rose strongly for a second straight month, up about 5-1/2 points in April to 57.9. The gain is centered in expectations which jumped 7 points to 77.4, reflecting rising optimism over the outlook for business conditions and easing pessimism on the outlook for employment and income.

The assessment of the present situation also improved with the index rising more than 3-1/2 points but to a still severely depressed level of 28.6. Pessimism is easing with fewer describing current business conditions as bad and fewer describing jobs as hard to get (45.0 percent vs. March's 46.3 percent). Other details show a jump in buying plans for cars and major appliances though buying plans for homes are still under water. Inflation expectations, despite the month's rise in gasoline prices, eased slightly.

So is the recovery finally beginning for Main Street? Econoday puts out a very interesting graph that shows total employment. The headline showed the unemployment rate rising to 9.9 percent from 9.7 percent in February. Nonetheless, there is positive news from the household survey as the jump was due to an 805,000 surge in the labor force. April household employment actually jumped 550,000. Basically, discouraged workers see hope of employment and have jumped back into the labor force. Essentially, the spike in the labor force points to optimism on the part of workers.

But progress in bringing down the unemployment rate is going to be slow. The median duration of unemployment rose to 21.6 weeks from 20.0 weeks in March and the percentage of unemployed, marginally attached and part time is still above 16 percent of the workforce, the worst number since the Great Depression. And so the trickle down recovery is just that—improvement for Wall Street and the corporations before Main Street.

Harlan Green © 2010