Three Giant Headwinds For the US Economy
I could read and research all day every day and never really gain as much true understanding as when I just talk to people and hear their stories. Here in rural northern Colorado, I have a lot of conversations with hard working Americans (aka blue-collar, middle-income types). I spoke at length with a guy who’s story crystalized three mega issues that continue to be a problem for the US in terms of our growth potential and competitive stance in the world.
Let’s call him Joe to protect his privacy. Joe is a 62-year-old civil engineer with two 20 something kids. He has lived in Routt County, Steamboat Springs since the 70’s “off and on”. In the 70’s Joe told me that the Savings and Loan bust along with the energy crisis forced him to move back to the city for work. Engineering jobs dried up with building and development work. It was a very tough time for the state of Colorado ( I remember it and I was only a 12 year old). Joe eventually had to move his family all the way back east for work but then his wife got a teaching job in Fort Collins and they moved back to CO, ultimately back to Steamboat Springs. I asked Joe if he was thinking about retiring now and he chuckled.
“No, I don’t have much saved so I’ll be working as long as they still need people like me. “ I interpreted that to mean as long as they need his 1970’s skill set as a civil engineer. I also heard the insinuation that his skill set might be going the way of the horse and buggy.
He’s got a job with the city, water conservation district (government job).
Joe also talked about how everything is so expensive now and he just can’t make enough. He cited healthcare costs “don’t know how I can keep paying this…”
Joe is looking forward to filing his tax “return” which struck me. Joe pays a little income tax but never has a tax bill at the end of the year. He files his taxes and expects a “return” every year like much of the country. Strange that people think of doing their taxes as filing a “return”.
So Joe’s situation and story is one that many could tell in our country and the very reason that Trump’s campaign to “Make America Great Again” found such fertile ground. We should all be compassionate and empathetic to those in this situation, which is not of their choice or preference. So let’s dive into the three themes, apparent in Joe’s life, that are mega problems for the US. Time will heal all but it might be a lot of time.
Theme #1 – Under-Skilled Labor Force
I spoke about this several weeks ago (The Busted American Dream) so this theme is not new to regular readers. Our country has done a poor job of educating and training our general population to be adaptive to the dynamic nature of workplace demands. We have been operating on the basis that if Joe is trained as a civil engineer, he’ll be fine, work a 9-5 job and make ends meet. Joe doesn’t feel that way. His job skills were probably outdated years ago but never adapted to that fact. He probably knew it but didn’t do anything about it. He had, and has, opportunities for an encore career but I suspect his motivation to reinvent himself, learn a new trade, start a new company, etc., at the age of 62 is pretty limited. Our system needs to teach and train our population not to be one thing or another but to be problem solvers, to be thinkers with the ability to do many things in our lifetimes. The pace of change in the world is outstripping our ability to adapt as a population and it’s creating a lot of strain, anxiety, and frustration. No political leader can make this strain go away without a massive welfare state. It can only be solved by starting at the bottom of the education chain and teaching our next generation how to create their own job, evolve within an industry and generate real value for the companies they work for. Clock punchers and button pushers doing routine and repeatable tasks are becoming obsolete very quickly as technology replaces them in today’s work environment. Coal miners, factory workers and most manufacturing jobs in the US fall into this camp. Again, no public policy initiative to bring them back will ever take root as this type of work is just too costly and inefficiently executed by labor. Up here in Coal country Colorado, the local mine and coal-fired power plants operators are very nervous about the shift to natural gas because they know that a power plant run on natural gas needs only 1/8 as many employees and zero coal miners.
Parents of young children - there is a magical intersection between problem solving and creativity. You should demand that your schools find it and teach it.
Theme #2 – Massive Debt and Inflation
Joe mentioned this and it’s very real. Inflation is in everything today. Food prices, healthcare costs, building materials, rents, housing, restaurants, etc. We all feel that reality and this is just the beginning, especially if protectionism, immigration reform and import taxes remain on the agenda. After nearly 30 years of falling costs and deflation, it seems highly likely that the tide is turning back toward actual inflation (reflation). This is fine if you own a lot of hard assets or even investment securities but not ok if you’re Joe. Joe doesn’t have a lot of stocks, Joe doesn’t own a lot of hard assets, and Joe probably doesn’t own the majority of his house. So for Joe, inflation is just a tax in his lifestyle. I was hopeful that the Healthcare proposals would somehow cut costs but it didn’t happen and this failure leaves Americans with a giant tax just to cover the most basic healthcare coverage need. Inflation and the rising costs of living are things that we can manage marginally by the choices we make but not all are discretionary. Along the same lines and certainly related, is the level of public debt in the US which is way, way, way off the charts. I’m afraid to even look, but it’s probably north of $28 Trillion this year, which is several times US annual GDP. The government will again raise the debt ceiling this month because they have never been able to afford their own current spending, ever. In 2008 and 2009, private debt, in the form of foreclosures and bankruptcies, was simply absorbed into public debt. Remember, “Too big to fail”? That is government speak for "we are going to turn your private bad debt in our collective public bad debt so that you don’t experience too much pain". Well, the debt is still there and inflation, very high inflation, is one way that governments can get rid of it. At some point, the End Game for our debt will play out but I’m not clear exactly how yet. I can’t image the US defaulting on our Treasury bonds but I supposed that’s possible. I can’t image inflation in double digits but maybe. This theme is really on the macro side of things and probably off of the radar for most from a day-to-day standpoint. But it’s certainly one of those variables that create headwinds for growth and our competitive position in the world. It’s a bit like a carbon monoxide; you can’t smell it or taste it, but it can be very deadly.
Here’s a chart from Nerdwallet that sort of says it all capturing the rising costs of healthcare, credit card debt, and concerns about your financial condition.
Theme #3 - Undersaving Generation
The data surround total saving for retirement among the baby boomer generation are more than a little sobering. John Mauldin delivered an excellent and extensive piece on this topic this morning in his “Thoughts from the Frontline” newsletter. You can find it here
We can’t know how this story ends, but like Joe, we are looking at a generation that hasn’t put enough away. They are going to be a very dependent generation leaning on children, government safety nets, social security, Medicare, Medicaid, etc. It’s really hard to say how this happened but the hard facts are undeniable. Many who assume they have pensions to cover them are now becoming doubtful that they will ever see those benefits. Sears is a classic case, recently in the news. Today their bountiful pension plan is underfunded by nearly $1.6B. Benefits are being cut, but more importantly, the PBGC (Pension Benefit Guarantee Corp) now has a lien on the future operating revenues of Sears to help fill the gap. Not only is the pension plan failing but it’s driving Sears faster and faster into complete bankruptcy. They won’t make it.
The promise to pay is only as good as a company is solvent. Many insolvent company pension plans have been turned into public debt through the PBGC - aka the government. Please re-read Theme #2!
So our baby boomer population, by and large, has massively undersaved and / or become dependent on government entitlement programs to cover just the basic living expenses. This generation is not going to have the money to spend like they did in their younger adult years and spending is the driver of the US economy. The third headwind to growth in the US is not something that can be easily solved either by policy or time.
These are depressing realities. I understand that, but awareness allows us to address them, make changes in our own behavior as we can and do our best to navigate through the environment ahead. That is part of our job as your financial advisor. The US may not be the economic powerhouse of the future. But there are a lot of opportunities within that macro picture and lots more opportunities outside of the US. We need to stay flexible and open to all with our personal finances.
Sorry for the bummer update so early in the week