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Benson's Economic & Market Trends

Joe Six-Pack's Reality Check

July 8, 2004

"Joe Six Pack" is the mythical character and legendary worker who fights in our wars, works in our factories, loves baseball in the summer and football in the fall, drinks beer, drives a truck and tries his best to support his family by working for an hourly wage.  There are tens of millions of men and woman like him who keep America moving because of their dedication and hard work, yet corporate America would just as soon send their jobs to China, while our government only pretends to care in an election year.

The Bureau of Labor Statistics ("BLS") tracks all kinds of useful data, freely available to anyone who wishes to look. A major data series that tracks the wages of most employees on payrolls for service and production jobs shows average weekly earnings (determined by the hourly wage rate and number of hours worked) are: 

Weekly  Earnings


June '03          June '04          %Change

$521.73           $524.37           0.5%

You'll notice that wages have hardly increased while the economy has boomed. With the year over year Consumer Price Index ("CPI") running at 3.1% as of May, and the escalating prices of gas, food, etc., Joe has been fortunate to receive extra cash from two short-term sources:  Home loans and a Tax Refund.

First, banks remain extraordinarily generous in their mortgage lending policies. Even though cash out mortgage refinancing is slowing down, banks will continue to make home equity loans available (a variable rate is preferred, of course). Based on home equity lending in the first half of this year, it is estimated that $400 billion will be drawn on home equity lines of credit in 2004.  A staggering number!   

The chart below indicates the dollar amount (in billions) of tax refunds sent to individual taxpayers through June 2004:  

Individual Tax Refunds

(in Billions of Dollars)

January " June 2004


J          F          M        A         M        J

$6        64        48.5     56.3     26        3

The economic consumption party since 2001 has been financed by three sources of cash:    Increases in personal income; tax cuts; and, mortgage borrowing.  Unfortunately, increases in personal income account for only one-third of the increased consumer spending.   

What's clearly evident from the BLS data is that Joe's paycheck has not increased with inflation, but the paychecks of the Champaign and Chardonnay crowd has.  You might ask "but a hundred billion of tax refund dollars floating around the country creates economic growth, right?"  Wrong!  For the remainder of 2004 and through 2005 when the tax refund checks have stopped coming, Joe, and millions like him, will once again be left alone with bills that are difficult to pay.

You don't need to be an economist to forecast that spending at Wal-Mart, GM, Ford, etc. would start looking weak in June.  Indeed, with the tax rebates declining in May and the slowing in employment growth evidenced in June, this could easily be the start of a new trend. The consensus economic forecast for the second half of 2004 is that the economy will pick up and accelerate.  Could the consensus be wrong now that the best of fiscal and monetary stimulus is over?

Much political capital has been made by the current administration trumpeting that jobs are coming back to the U.S. economy.  However, in the monthly payroll survey data, efficiency and productivity have never played such a significant role in the increase in jobs. This data is based on the BLS polling establishments which, in turn, employ the workers. Ordinarily, in a recovering economy, new establishments hire more Joes.  The difference is that these new establishments have not yet been set up to be polled in the payroll survey. Fortunately for productivity, the BLS has a fancy computer model, or "black box", to estimate the number of new establishments and number of workers they are hiring.  Using this black box computer magic, the number of non-reporting workers can now be counted!

Nearly two-thirds of new jobs in the 2003 payroll survey have been created by this technology. Since the beginning of 2003, two-thirds of the workers added to the number of those employed, are estimated.  Whether there are real people working actual jobs will only be known long after the November election.

We realize this computer model assumes a strong self-sustaining economic recovery, but we doubt that it takes into account two key elements that could make a mockery of the model.  The first key element is U.S. businesses are continuing to build new factories in Asia (not in America) to meet demand. The second key element is the recovery is primarily induced by classic "Bread and Circus" stimulus " Dating back to the Romans " and not the hoped-for, and widely advertised, self-sustaining economic recovery.  

For the world's financial markets, much rides on the black box being accurate.  If jobs are really being created, then these new workers with new earnings will likely keep the economy rolling forward.  Contrary to this belief, we believe Joe is running on empty and fewer real jobs, and particularly fewer good paying jobs, are being created than the productive computer says. It's likely that Joe and his wife will be forced to borrow more on their house and cut back on spending in 2004.  If the Fed keeps raising interest rates, the ability to borrow against housing will be offset by consumers actually having to pay for the debt. 

Moreover, we are skeptical that the BLS is giving the financial markets a true read on labor conditions.  For an administration that justifies war with false assumptions, what's the harm in a few optimistic assumptions that cannot be refuted for a computer model?  This is an election year after all.   (Remember the old adage: "There are Little Lies, Big Lies and Statistics").

For the economy, it's surprising how weak it really is; for inflation, prices in the pipe line are on the rise, allowing the Fed to remain very moderate in its interest rate increases. For the financial markets there is a growing realization that not only is the Fed behind the curve on inflation, they are happily behind the curve. If the Fed even thinks of fighting inflation, they could crush the economy and bring back real deflation fears.  Wage increases across the board are not enough to pay for the current standard of living, let alone start paying interest on old debt borrowed to live well.

America's massive trade and budget deficits, weak economy and rising inflation, will leave the U.S. dollar increasingly vulnerable to a significant decline in value.  I guess Joe Six-Pack is lucky he can't afford a foreign vacation!