It’s timely that the US received a better than expected jobs number over the weekend. Some 175,000 jobs were tipped by economists for the month of June but 287,000 showed up! This result was needed because the May number came in at 38,000, which shocked a few market players but it now looks like a rogue number. In fact, it was revised down to 11,000.
If this June number was weak, optimists would have had to admit that the US economy could be in trouble, but now they can hold solid to their belief that the Yanks are on a economic comeback trail, albeit not as strong as I’d like.
But you can’t always get what you want.
It’s now time to share a complaint on my TV show from a viewer called Anthony. Ant is a little annoyed at my optimism, as you can see:
“Can you please dissect the GDP figures and what they mean. It's a loaded question but Australia is in an income recession and has the highest personal debt in the world. For those who lack knowledge, taking your 'advice' has cost them plenty. For once, put some realism in your program. Overly bullish to your poor (er) clients.”
That’s a hard call, but as we can see from Anthony’s tone, he’s not for sugar coating stuff.
Inexplicably, I don't think Anthony reads me because I have covered the great economic growth, yet income recession story that pessimists love to run but I will recap to explain my view. Also, I can deal with his unfair criticism, which is not new to the economic debate. For centuries, economists have argued with each other and it’s always more heated around election times. You know, it’s as if some economists have left or right leanings and they seem to want to embarrass their hated rivals — be they economic or political ones.
Anyway, let’s deal with economic growth and income recessions.
Economic growth is when real Gross Domestic Product increases. Over the past two quarters, we’ve grown at over 3%. If you use the RBA’s preferred measure of two quarters times two for an annualised number, it’s 3.6%. If you did the same for the US, it would be 1.2%, so we look good in the growth stakes but forecasts for the latter are on the rise, which, as a cursed optimist, makes me smile.
An income recession looks at Gross National Income and it has gone backwards over a number of quarters. Those who don’t like good economic growth news protest about people like me ignoring the plight of income starved Aussies. You know, when I taught economics at UNSW, textbooks never focused on income recessions. However, I accept that economists do come up with new descriptions of our economic condition, especially when a disparity between economic growth and income growth emerges.
Intrigued by this issue, I thought that Gross National Income might be, like economic growth readings, a lesser indicator of what the average household might be living through in this statistically created income recession, so I sought objective advice from two respected economists — CommSec’s chief economist, Craig James and AMP’s top economist, Dr. Shane Oliver.
This is what I sent them:
“Those saying we should focus on an income recession look at Real Gross National Income (GNI). But I thought Disposable Personal Income (DPI) might capture the effect of lower interest rates and cheaper stuff bought from the Internet and disruptors, etc.
What do you think? DPI has increased and shows a better picture than an income recession, but is it a better look at how we’re doing?”
And this is what Craig James replied with: “Totally agree – the focus should be on what the average person is earning.
Personal disposable incomes up 3.8% over past year. Prices up only 1.2%. (chart attached) I would have thought this was positive…”
And here’s what Shane Oliver came back with: “Talk of an income recession based on Real Gross National Income being down 1.3% over the last year is way over the top. The main driver of the slump in real GNI is the slump in commodity prices, iron ore, coal, etc. And this does affect the economy overall but only parts of it (e.g. miners, revenue growth in Canberra, etc.). Most Australians do not get paid in iron ore or coal so their slump is of less relevance. I would agree that DPI is a better guide for most Australians and real growth in it is still positive, albeit modest.”
There you go, Anthony. I might be relatively optimistic but I do try to be realistic and I don’t just live by some silly mantra that I have to be positive, as my viewers, readers and clients could end up being poorer. But even on that score, your criticism looks short-sighted and self-serving.
My TV show started four nights a week after Lehman Brothers was allowed to fail, in late 2008. After the US rescue program was constructed, I started looking to history to see how stock markets respond after big crashes. IBISWorld’s Phil Ruthven talked about big initial rebounds between 30-80% and, from about January 2009 until March 2009, I was pointing out that economic readings were actually getting better, despite what you read and saw in the media that was scaring your pants off.
From March, stocks did rebound. On March 6, the low was 3145.50. By the end of the year, it was 4870.60, which was a 54% gain! Anthony, my optimism paid off there. And since then, I have been pro-stocks for long-term investors. I can’t help short-term traders, apart from getting my experts who pick and dump stocks.
If a viewer believed me and bought an ETF for the ASX 200 index in March, they’d be up 66% plus dividends and franking credits of about 6% over seven years, which is 42% for a grand total of 108%.
Along the way, I have recommended buying the dips and, at least four years ago, I nailed my colours to the mask, advocating dividend paying stocks, which have performed well.
I can’t be responsible for how people invest but largely I’ve been right that our economy has grown better than expected, that stocks have been returning better annual income than term deposits and that being optimistic has been more right than being pessimistic.
One day I will become bearish. The economist J.M. Keynes was accused by a rival of changing his views and his response was memorable: “When the facts change, I change my mind. What do you do, sir?”
My bottom line is that it’s not time yet to become a bear. I said that in February this year when the ASX 200 index went down to 4707 or so and since then we’re up 11.11%, which has not made my viewers, readers and clients poorer. And today, our market is set to go higher, thanks to the Yanks and their job numbers, which an optimist like me was tipping.
If my viewers are poorer it’s not because of bad advice from me or because they’re in a minority in Australia whose income might have fallen. And if they’re in an occupation where they’re losing out to the Internet and low cost foreign workers, you can’t blame me for that!
With Wimbledon just over, all I can say is: “Game, set and match, Anthony. Thanks for coming.”