THE ZEITGEIST: AUGUST 16, 2016
THE TRUMP IMPLOSION
The facts don’t lie: Donald Trump has suffered an unusually steep post-convention popularity slide. When I last wrote about the race on August 1, Trump was behind in the polls by 1-2 % points. Today he is behind by 7-8 % points. (The gap actually peaked late last week at nearly 10 % points; Trump may be bouncing back a bit.) The futures market odds have shifted from 67-33% to around 75-25% for Clinton. Hypermind, the “superforecaster” market site, gives Trump a bit more love at 69-31%. Meanwhile, among big-name experts, the odds have shifted more decisively—to 87-13% (from the Upshot), and to 89-11% (from FiveThirtyEight). The earlier gap between The New York Times and Nate Silver has pretty much vanished.
A decline of this magnitude is hardly unprecedented. In 1988, Michael Dukakis led George H. W. Bush in the polls by an amazing 17 % points (55-38%) just after the conventions. A month later, Bush pulled out to a modest lead—which he never gave up. And history shows that underdogs have frequently overcome a 7-8% deficit in the polls. (John Kerry led G.W. Bush by 8 % points in August of 2000.)
So sure, such comebacks are not unusual. Trump’s problem is that even many in his own party suspect he may be too damaged to pull it off. Since the convention, Hillary Clinton has succeeded brilliantly in making Trump’s unstable temperament the central issue of the election. She has rallied a growing number of “good government” Republicans, including 50 former national security officials (from Michael V. Hayden and John D. Negroponte on down), to support her. Wall Street Journal columnist Peggy Noonan, often sympathetic to Trump, penned an especially scathing piece with an epitaph-like title: “The Week They Decided Donald Trump Was Crazy.” Looking at the 2016 choices, Noonan suggested we borrow a little-used Greek word to describe our situation, “klakistocracy,” government of the worst. The following week, Time put “The Trump Meltdown” on its cover.
According to econometric models (again, see my earlier note), the GOP should have a decided advantage in 2016. But according to an index model comparing the decency and “respectability” of the two candidates, Hillary enjoys a big lead—and she’s shrewdly pressing that advantage. No one’s talking about anemic GDP growth. Instead, everyone’s speculating about where Trump scores on the narcissism index.
This contest is still up for grabs. In a contest between two candidates who are so thoroughly disliked among the undecided 20% of the electorate who will determine the outcome, one should expect lots of poll volatility. It’s like a stock in which marginal buyers and sellers lack any conviction. It bobs around without any real support or resistance levels. Trump’s best strategy would be to stay on message, otherwise shut up, and wait for the press to turn (as it always does when it gets bored) to the other candidate’s high negatives. Unfortunately for his supporters, Trump may be incapable of doing this. He appears to be a dog that chases every car.
WHY HILLARY IS EXCEPTIONAL
Clinton, meanwhile, has had a great two weeks. Among her best decisions, showcased with flags and chants both at the Democratic Convention and in her recent speeches, is to celebrate again the idea of American exceptionalism. This puts daylight between her and Obama, who has always found the concept embarrassing. (Once asked if America is exceptional, Obama limply explained that sure he did, just as the Brits believe in British exceptionalism and the Greeks believe in Greek exceptionalism.)
American exceptionalism is one more sign that just as the Democrats are turning left economically, they are turning right socially and geopolitically. Trump, by weird contrast, dislikes the term as much as Obama does. The candidate who wants to “Make America Great Again” openly suggests that America disengage throughout most of the world and argues that China and Russia ought to be ceded their rightful zones of influence. Why do you think they call it the "South China Sea"? And do we really want to risk global war over Latvia? Not since the 1930s has a GOP presidential candidate expressed such obvious disinterest in assuming global responsibilities. It's a dizzying reversal of long-held partisan principles.
Clinton’s embrace of an American-greatness foreign policy, along with her relentless focus on her opponent’s alleged incapacity, is triggering anxiety among the #AfterBerner left wing of her party. Even if Clinton wins by a landslide, they warn, she will have zero mandate for any of the sweeping domestic or foreign-policy reforms they favor. Their complaints are testimony to Clinton’s good judgment, since her move to the center (wooing Republican voters, no less!) is clearly her best strategy in trying to win the election. And winning, we can be certain, is at least as important to Clinton as it is to Trump.
As if to accompany Hillary’s well-choreographed optimism about America’s future—and her aversion for Trump’s darker vision—the TV networks brought the Rio Olympics to millions of U.S. living rooms. There we saw Americans of all genders and colors winning gold after gold amid repetitious Star-Spangled Banners. America in decline? No evidence of that in Rio. Millennials desperately yearn for a country they can be optimistic about. Clinton is giving them something. Trump isn’t. Most of the time, Trump has a better feel for America’s new mood than Clinton. But here, it’s Clinton who’s more pre-seasonal in her thinking. She wins this round.
ECONOMIC WARNING LIGHTS
Two weeks ago, we learned that Q2 GDP weighed in at only +1.2% SAAR. This meant that H1 GDP growth was so poor that we will require at least 4.2% growth in both Q3 and Q4 just to match our annual rate in 2015. So pray to the economic gods. The current consensus forecast for Q3 is 2.5-3.0%. The Atlanta Fed Nowcast for Q3 is 3.5% (and falling).
Most troubling about the Q2 report was the implosion of fixed investment, inventories, and net exports. American consumers—by purchasing autos, eating out, and spending on services—accounted for more than double the entire net rise in real GDP. Thanks to these heroic consumers, U.S. GDP keeps pushing forward. And thanks to U.S. GDP, the global economy itself stays above stall speed.
How long can this continue? The immediate monthly drivers--employment, retail sales, and personal income—suggest that U.S. consumers could keep this up for quite a while. Sure, the YoY rate of change is gradually slowing down, but over the last three months this has been more than compensated by a 100 bp+ decline in the personal saving rate. Meanwhile, we see none of the usual culprits which so often tackle the consumer late in the business cycle. Wage growth and inflation expectations remain tame. Interest hikes are off the radar screen.
Last week, however, two longer-term warning signs appeared. According to FactSet, it is now becoming ever-more certain we will see negative S&P 500 earnings growth in Q3: The August 12 estimate is now -2.0%, down from -1.7% a week earlier. Q3 will likely become the sixth consecutive quarter of YoY earnings decline. Dropping profit margins, at some point, will move beyond cutting cap ex to cutting payroll—even in the absence of wage pressure.
Unsurprisingly, with earnings sinking and the SPX climbing, the TTM P/E has been on a ballistic YTD trajectory. Caveat emptor!
Meanwhile, BLS released their quarterly output and productivity metrics for the nonfarm business sector. Here too the headline stat was alarming, and not in good way: Growth in output per hour was negative for the third quarter in a row. Since 2005, annual productivity growth has fallen to a mere 1.0% (CAGR), despite a fall in the employed share of our working-age population. Over the last five years, YoY, it has averaged 0.55%. That’s close to the worst performance in post-WWII history—and a primary reason why, in any normal presidential election year, the incumbent party should be so easy to beat in 2016.
No, falling productivity growth is not a statistical illusion. (See my Demography World column on this.) And yes, it does have at least two negative near-term consequences.
First, it directly constrains the growth rate of real National Income, which thereby constrains all of the purchases (consumption and investment, less net imports) comprising real GDP. We already know that the growth in the working-age population is decelerating drastically, over the next decade, to a mere 0.2-0.3% annually. Add only 0.5% productivity growth to that, and we may be talking about less than 1.0% GDP growth in a normal year. No, we’re not a demographic basket case like Japan. But unless our productivity re-accelerates, we will feel like Japan.
Second, as the expectation of slower real income growth gradually settles in among U.S. households, personal savings rates will necessarily rise—just as they must also rise in the expectation of lower interest rates. Why? Because no one wants to be a pauper in old age (listen up, Generation X!). When wage growth is rapid and real interest rates are high, no one gives any of this a second thought. Ride the wage wave and save just a bit, and you will be fine at age 65.
But those conditions no longer hold. Every legitimate theory of lifetime consumption—Miller-Modigliani, Ramsey, Duesenberry—all acknowledge that "target savers" will raise their savings rate when wage growth and ROR expectations shrink. And that’s where we are today. My takeaway? With a great deal of confidence (something I rarely say), I believe the personal savings rate will climb from today’s dip and put a further crimp into consumption, which—until now—has been the furnace in the GDP locomotive.
NewsWire
- Fully 73% of Millennials support auto-enrollment in 401(k) plans, but less than a third (29%) are offered that option. Although Millennials aren’t confident that they will have enough money saved for retirement, they are certainly willing to take all the right financial steps early in their careers. (Wells Fargo)
- Columnist Constance Gustke highlights the growth of startups focused on the longevity market—that is, the wants and needs of aging Boomers. Her observations are spot-on: As Boomers continue to age, they are going to want to spend their money on more than just walkers and orthopedic shoes. (The New York Times)
- Food giants like Hershey, ConAgra, and General Mills have been winnowing down their ingredient lists to as few elements as possible. For today’s consumers, “processed food” is a dirty word—particularly in a world where people want to know exactly what they are ingesting. (The Wall Street Journal)
- Reporter Story Hinckley tries to understand how to “Make America Great Again” by asking G.I.s and Silent what they think made America great in the first place. Most of their answers focus on unity, teamwork, and everybody doing their part—qualities that are seeing a comeback thanks to inclusive, group-oriented Millennials. (The Christian Science Monitor)
- David Brooks believes that Millennials may turn the tide on the “Great Affluence Fallacy”—that is, the desire for an autonomous culture that leaves most people unhappy. He hits the nail on the head: “If Millennials are heading anywhere, it seems to be in the direction of community.” (The New York Times)
- Media outlets are abuzz following the release of a recent study showing that Millennials have less sex than any generation since the Silent. Ultimately, the best explanation may be the simplest: Millennials are poor, and, as one reporter puts it, “parents’ basements do not make great boom boom rooms.” (The Daily Beast)
- Dish Network has unveiled its new (skinny) Flex Pack that gives subscribers access to 50 channels starting at $29 a month. The company joins Comcast and Verizon as only the latest to introduce cheaper channel bundles aimed at would-be cord-cutters. (Mashable)
- A recent survey about trust in the workplace shows that Xers are the least likely to “have a great deal of trust” in both their boss and their company when compared to Boomers and Millennials. These findings are unsurprising given Gen X’s reputation as a skeptical, historically unsupervised group. (Ernst & Young)
- Preliminary data show that the birth rate for women ages 15 to 24 declined to another record low in Q1 2016, while rates increased for all women ages 30 to 44. The uptick in the early-30s birth rate suggests that more Millennials who had postponed childbearing are finally having children. (National Vital Statistics System)
- Following the release of the government’s latest dietary guidelines for Americans, only 15% of Boomers report that the guidelines had any effect on how much animal fat they consume, compared to 54% of Millennials. Wellness-conscious Millennials are more likely to trust expert opinions, while individualistic Boomers prefer to (literally) go with their gut. (Truven Health Analytics/NPR)
Did You Know?
All Work and No Play. We’ve mentioned before how ever-more Americans are letting their vacation days go unused. (See: “Give Me a Break.”) And thanks to mobile IT, even those who do cash in their paid time off are staying plugged in. As The Wall Street Journal reports, many beach clubs are adding Wi-Fi and other remote-working necessities at the request of telecommuters. Sunny Atlantic Beach Club in New York has upgraded its complimentary Wi-Fi three times in the past two years. Nearby Silver Point Beach Club installed Wi-Fi earlier this summer, despite concerns that its beach cabanas are not exactly conducive to work. There is, however, a countermovement underway. (See: “Did You Know? No Service? No Problem.”) New York’s historic Quantuck Beach Club doesn’t offer Wi-Fi and restricts cell phone use to a small area. Meanwhile, Silver Gull Beach Club General Manager Jamie Blatman has resisted the push to install Wi-Fi: “We’re a beach club. We don’t have an IT department.”
Freelance or Free Fall? The latest PricewaterhouseCoopers report shows that 86 percent of surveyed U.S. workers at least somewhat agree that they have a strong desire to work independently. At the same time, 39 percent say that income uncertainty is the least appealing aspect of freelancing. This tension illustrates a common concern surrounding freelancing: Today’s employees value flexibility, but worry that it comes at a price. This is particularly true for Millennials, who are less likely to accept the risks of working independently. In fact, only 29 percent of 18- to 24-year-olds and 33 percent of 25- to 34-year-olds strongly agree with the statement: “I have a strong desire to work independently.” For 35- to 49-year-olds and the 50+, this share rises to 49 percent and 65 percent, respectively. The same trend holds for the desire for job security. While Millennials are more likely to say that job security is very important, their elders are less likely to agree.
