Inflation came down slightly in May, with the consumer price index growing by an additional 3.3 percent (compared with 3.4 percent in April). Economists rejoice because prices are growing less fast, but U.S. households suffer and groan. This is understandable when the prices of groceries and other household items are more than 20 percent higher than they were three years ago and aren’t coming down anytime soon. Energy, transportation, and shelter cost increases since 2020 are even worse, and this is the lived reality of most Americans.
As a result, the American consumer, who traditionally has been the engine of U.S. economic growth, is running out of steam. Households have been maxing out credit card and other debt, and depleting savings to cover expenses.
Officials continue to argue that the employment market is strong, evidenced by statistics showing positive job creation. Even still, most of these jobs—and the official employment numbers that accompany them—reflect lower-paying part-time jobs. Over the past year, 1.1 million full-time jobs have been lost, replaced by 1.5 million part-time jobs. Who wins in that environment?
Immigration—most of it illegal—has been the source of nominal job growth at the lower end of the market. But this has come at the cost of native workers. U.S. unemployment, while still below levels that would historically suggest recession, is rising. May’s 4 percent figure is up by 17.6 percent from April 2023 and above 2019 levels. Real (i.e., after inflation) wages, as measured by median usual weekly earnings, are flat versus pre-COVID-19 pandemic levels. In other words, the working and middle classes are barely treading water, if not being swept further and further away from a stable financial shore.
The equity markets reflect none of this. Going from one all-time high to the next, the markets imply that things can only get better. For example, the total U.S. market capitalization to GDP ratio, recently at 188 percent, has since 2020 been at the highest level ever recorded. Whether such levels are justified by innovation in artificial intelligence and other technologies is debatable. More likely, it seems a combination of money supply expansion, excess liquidity, asset price inflation, and a euphoric optimism that hopes against hope that the party doesn’t stop.
The disconnect between Wall Street and Main Street can’t continue forever. Eventually, either the economy must grow into today’s lofty valuations, or equity, real estate, and other market valuations will have to reset.
