The world is going to heck in a handbasket, and workers are overwhelmed. But equity investors will pop the champers come year-end, and the US economy is headed for its best year in decades. That’s the news we are asked to digest this week. Here goes.
Davos Titans Worry
Start with the worries of the Davos crowd, the constituency of the World Economic Forum. Wherever this elite looks, doom looms. Titans on the Titanic, comfortable, rich, powerful, believe we are steaming towards a field of icebergs. Only 16% of the 1,000 business leaders responding to the WEF Global Risks Perception Survey are optimistic about the outlook for the world, and even fewer, 11%, believe the global economic recovery will accelerate. Scattered throughout the report and its accompanying release: “Health and economic disruptions are compounding social cleavages…. Digital inequality …. Cyber threats now growing faster than our ability to eradicate them permanently…. Climate change could shrink global GDP by one-sixth …. The next three years to be characterized by either consistent volatility… or fractured trajectories…”
Workers Of The World Are Stressed
The workers of the world also have worries, although their concerns are not quite those of the Davos elite. A survey of 20,000 workers by the consultancy Bain & Company and researchers at Dynata finds that 58% of workers across ten major economies that account for 65% of global GDP are rethinking “the balance between work and their personal lives…. Younger generations are increasingly overwhelmed… . Under mounting psychological strain…”. The portion of American millennials ( 25-40 years of age) believing they will ever earn more than their parents is the lowest it has been since any generation since World War II
The “upper echelons…of the business hierarchy” work the longest hours because “busyness is seen as a sign of status.” In America, 25% of executives “are on a mission to change the world” and need to recognize that their idea of a good job won’t necessarily be shared by front-line workers, many of whom prefer to work at home, although in the US workers preferring to return to the office full-time rose from 16% of those surveyed to 22% between January and August.
The stressed workers, fortunately, do seem to be managing to cope. Quit rates are at record levels, partly in response to the 10-12 million job openings. Worker shortages are producing rising wages and considerate employers. As the latest Fed survey of business conditions puts it, “While many contacts noted that wage gains among low-skill workers were particularly strong, compensation growth remained well above historical averages across industries, across worker demographics, and across [U.S.] geographies. Besides wage gains (see below), many contacts indicated adjustments to job demands – such as accommodating part-time work or adjusting qualification requirements – to attract more applicants and retain existing work forces.” An example of the latter is Amazon, which employs 1.3 million full- and part-time workers in the U.S. The company decided last year to exclude marijuana from its pre-employment drug screening program.
Economists See A Happy New Year
Before deciding that we are in for a year made dreary by Davos-predicted disasters and stressed-out workers, consider that surveys are often designed to produce the bad news that generates headlines. Consider, too that the savvy Investment Strategy Group (ISG) at Goldman Sachs believes the economy can “Pilot Through” these icebergs in the next few years. It predicts the “very well balanced” US economy will grow 3.9% this year, about in line with the 3.7% forecast of the World Bank, which expects global growth to come in at 4.1%, down from 5.5% last year.
The Goldman team expects three, perhaps four interest rate increases this year, which would still leave inflation-adjusted rates in negative territory. Perhaps most surprising, the ISG expects inflation to drop by the fourth quarter of this year to an annual rate of 3.3%, down from just about double that rate in the last quarter of last year. Equity investors will hit a few “downdrafts”, with share prices dropping 5% (100% probability) and even 10% (75% probability). But they will end the year ahead of the game.
Bankers Look To Sinatra
Which brings us to still another authority, this one relying less on surveys or on economic models and more on the movement of hard cash in his customers’ bank accounts and their use of their credit cards. Jamie Dimon, CEO of JPMorgan Chase, last week assured Americans that happy days are here again, that Sinatra’s “The Best Is Yet To Come” is a more accurate forecast than the moaning of the Davos crowd or the whining of surveyed workers. “We’re going to have the best growth we’ve ever had … since maybe sometime after the Great Depression. Next year will be pretty good too.” This despite, or perhaps because he believes there “could be six or seven rate increases” by the Fed this year. Consumer balance sheets have never been in better shape, and they continue to spend. “Their debt-service ratio is better than it’s been since we’ve been keeping records for 50 years. … If we’re lucky, the Fed can slow things down and we’ll have … a ‘soft landing’.”
A Pinch Of Salt
Before imbibing the good news be aware that economic forecasters may be under-estimating the growth-shrinking consequences of taming the current 7% CPI inflation rate, its highest since 1982 and with staying power the Fed has consistently under-estimated. Wholesale prices soared at a 9.7% rate last year, and will soon be felt at the consumer level, as will further increases in rents. The Lindsey Group reports that average hourly earnings rose at an annual rate of 5.8% in the last six months and 6.2% in the last three months, and that wage rises are likely to offset the effect of stabilizing oil prices. Economists surveyed by The Wall Street Journal are expecting the unemployment rate to hit 3.5% by year-end.
And of course, be aware that bankers such as Dimon, whose bank has seen checking account balances soar for all four income quartiles of its customers, tend to don rose-colored glasses when higher interest rates are in the offing and a Democratic President’s tax-raising plans are stalled.
Heed Frank On Betting
There is plenty to worry about in addition to forecasts that might prove wrong. A revanchist Putin has troops deployed on the borders of Ukraine, and has the West dancing to his tune as it focusses on his “security concerns”. Xi Jinping is eyeing Taiwan and using China’s economic clout to have all sorts of capitalists seeking his favor by bending the knee on command. Iran is heading towards its very own nuke, a pursuit it is unlikely to abandon regardless of the any decisions in the conference rooms of Geneva. And a virus about to ease up on its infection rate is undoubtedly in search of its next variant.
At least for now, it seems best to act as if those dangers are incalculable and beyond the ability of ordinary folk to very much influence. The only possible course, at least for now and in America until the next elections, is to consider it “a real good bet the best is yet to come.” But Frank would have been the first to tell you that even a good bet is not a sure thing: luck has an unlady-like way of running out.