On these lovely warm Minnesota summer evenings, with business and consumer confidence soaring and the stock market still near its all-time highs, the wise person’s thoughts should turn to the coming winter.
It could be a hard one. And when it’s been 75 degrees and sunny for a long time, it’s easy to forget what bone-chilling cold really feels like.
It could also be true that folks haven’t realized just how long the sun has been shining in our economy. The current economic expansion is about a year away from setting a record as the longest in American history.
There’s an old saying that economic expansions don’t die of old age, but it’s not easy to predict when this one dies or even what will kill it, bringing on the next recession.
What triggered the last downturn was the collapse of a speculative bubble in residential real estate and mortgage markets. So few people correctly saw it coming that some of those who did later received folk-hero treatment in a popular Hollywood movie.
It’s no surprise that the confidence of business owners, too, took a long time to recover after that brutal of a recession. The closely watched NFIB index of how business owners are feeling bottomed out at its all-time low in early 2009 and didn’t get back to its long-term average until 2014.
Lately it’s been bouncing around near its all-time high.
Consumers are feeling pretty good about the state of the economy, too. That is reflected in the consumer sentiment data published by the University of Michigan. By this measure, consumers felt the worst in recent decades during the winter of 2008 and 2009.
That number has since crawled back to its pre-recession level and then kept inching higher. This year consumers are feeling more optimistic than they have felt in close to 15 years.
So what’s not to like? Maybe these kinds of numbers are only worrisome if you can’t get out of your head that great line of classic wisdom literature: “To every thing there is a season, and a time to every purpose under the heaven.”
I had already been stewing about choices in my own retirement accounts, trying to decide if now is the time to cut more firewood knowing that colder weather’s coming, when I caught up with a recent essay about Main Street from the Leuthold Group investment strategist Jim Paulsen.
Paulsen writes for the investment pros, but it was easy to grasp the point he was illustrating with an indicator he made up called the Main Street Meter. It’s time to lower our expectations of future investment returns.
In a quick e-mail to confirm time for a phone call, Paulsen pointed out that there’s no such thing as one market indicator that points the right way every time. Trust me, he later explained, a lot of his time has gone into looking for one.
His Main Street Meter is designed to capture what regular Americans, not the pros, are thinking. It’s calculated by dividing the consumer sentiment index by the unemployment rate. The way to get a big spike in this number is to have very confident consumers along with very low unemployment, which is what we have now.
While this might feel like dividing a couple of random numbers about the economy, Paulsen has chosen carefully. Stocks increase in value because increasingly confident investors are willing to spend more to buy the same stock or because companies can grow and make more money.
Consumer sentiment surveys as published by the University of Michigan tell him how Americans are feeling. Putting more money into stock mutual funds can seem like a great idea with the Dow Jones industrial average at 25,000 if there’s complete confidence it’s soon going to top 30,000.
Paulsen uses the unemployment rate as a measure of how much slack remains in the economy. Returns on investments like stocks come from growth. If there are a lot of people still waiting to go back to work, that means there’s a lot of growth potential in the economy still ahead. If nearly everybody who wants a job has one, there’s not a lot of room left to grow.
“I don’t know if people appreciate that you need capacity in the economy to produce financial returns, and we have used a lot of that up,” Paulsen said. “And you also need to be able to excite the players, and if they’re already maximally excited it’s even difficult to do that.”
Paulsen cheerfully admits his Main Street Meter hasn’t been carefully vetted, yet clients found it meaningful. Stocks appreciate when the economy seems to be getting better, and that’s not as easy when the economy has been growing for a long time.
It’s worth noting that Paulsen’s work was about longer-term thinking, and there’s no set of numbers to cause any particular worry this summer. It’s just that his report came with a chart that had three towering peaks in it, and the last time there was a peak as tall as 2018 was back in 2000.
That was nine years into the longest economic expansion in American history, when the unemployment rate had drifted lower than it had been in three decades and boisterous enthusiasm for technology stocks was carrying the NASDAQ Composite stock index to record highs.
By the fall of 2002, the NASDAQ had collapsed, down nearly 80 percent from March 2000.
A deep valley in the nearly 60-year chart of Paulsen’s Main Street numbers coincided with last decade’s Great Recession, of course, although the bottom seems to have come later than it did for some other measures.
You may remember the miserable late winter of 2009. The economy shed 800,000 jobs in March as job losses still seemed to be accelerating. General Motors was headed for bankruptcy court and in New York, stock trader Bernie Madoff pleaded guilty to 11 felony counts for having run a shocking Ponzi scheme.
The day Madoff left the courtroom in cuffs would have been a great day to buy stocks.