Two phenomena have occurred since 2000 that have had a great impact on slowing economic growth:
1) Slowing of demographic growth in spending, and
2) The sudden explosion of rural Chinese into urban areas and the global workforce.
In the family life cycle of spending, which I have thoroughly studied for decades now, there’s a strong acceleration between earning and spending after people enter the workforce around age 20 and begin to raise their kids and advance in their careers.
Spending begins to slow in its advance at the average age of 39, as people peak in their house buying with trade-up homes. Spending peaks at age 46 as people furnish their upgraded home, and it plateaus into age 53 when car buying peaks. After that, spending turns down sharply until the end of the person’s life.
This is important to note. Spending turns down sharply well before retirement, even if we’re forced to retire later.
That’s why, even though overall spending in the U.S. peaked in 2007, right on cue, spending slowed when the peak baby boomers, who were born in 1961, first hit that plateau in 2000. As a result, the stock market has made little real gains in the boom from 2003 through 2007, and then even less in the artificial “stimulus-led” boom from 2009 into 2013.
But that’s just the beginning…
After 2014, on a 53-year lag for the end of that plateau, spending will drop more dramatically and this will make any stimulus policies even less effective.
Mark my words here. A deeper downturn ahead is inevitable.
Even the more affluent Americans will peak in their spending around this point and they’re the ones who’ve driven the economy since the 2008 crash, as the Fed drove up their financial assets with quantitative easing to leverage their later spending trends.
But there is another, even more pervasive trend.
Starting in 2012, China’s government accelerated its urbanization efforts with huge investments in infrastructure. It moved from 38% to 53% urbanization in just 12 years.
That meant moving over 200 million people to urban areas and adding massively to the global workforce. Such low-cost labor has put downward pressure on real global wages ever since, as this chart of just U.S. wages shows.
Real U.S. Wages, 2000 – 2012
This great wage deflation from China has hurt many manufacturing companies around the world. It’s also hurt the jobs market. What it hasn’t done is cause significant competition for higher-end professional jobs and service industries like financial services, health care and education.
Since 2000, the middle class and everyday worker hasn’t kept up with progress and inflation.
Since the 2008 crash, 80% of people surveyed in the U.S. say we never came out of the great recession, while the more affluent 20% say the economy is better than ever.
Clearly income inequality is a major problem. This impacts spending patterns, which in turn affect the economy.
That means there are two scenarios that could occur here over the next decade. The first is the one I clearly favor. That is the global bubble bursts, with the largest and most impactful burst coming from China.
That would mean an even deeper global financial crisis that no amount of stimulus could offset. It would also bring a halt to China’s rapid urbanization and we could even see an exodus of rural migrants from the cities back to rural areas.
In turn, that would give the struggling middle class and factory workers in the U.S. and other Western countries a break.
The second scenario is that I’m wrong about China’s bubble bursting, and despite a continued slowing in developed countries and an inevitable deleveraging of debt, China continues to be successful in pushing urbanization rapidly and enjoying the affect of its internal consumer demand finally accelerating.
After all, that is China’s plan: to convert from an export-driven economy to a consumer-driven one.
In this scenario, the pressure on real wages would get even stronger and that would make the global downturn worse for everyday people. It would help corporate profits of multinational firms, due to stronger demand from China, but the rest of us suffer.
I don’t think that’s likely. China has simply overbuilt and over-bubbled for there to be any other outcome other than a massive implosion.
I vote for the old-fashioned debt deleveraging and detox rather than the endless stimulus and overbuilding strategy in China.
Either scenario ahead means pain for the U.S. and developed economies. Stay sharp.
P.S. Steve Moore and I debated the topic of income inequality and unemployment on Fox Business, Money with Melissa Francis, last Tuesday. If you missed it, listen now.
|Follow me on Twitter @HarryDentjr|
Ahead of the Curve with Adam O’Dell
Last Wednesday, the Fed announced its decision to taper its bond buying program by $10 billion a month, or 12% of its prior monthly ante of $85 billion. That surprised many, who speculated nothing would happen until 2014 when Ben Bernanke passed the torch to Janet Yellen.