U.S. Economic History and other Topics
A Quick Lesson on US Economic History
Prior to 1870’s, the US was largely an agrarian society with two-thirds of families living on farms and two-thirds or workers in agriculture. From the 1880’s to 1920 we were an emerging, industrializing nation with growth in manufacturing, mining, and other industrial sectors. We benefited from the Spanish-American War and World War I to slowly become a member of the developed nation club. Manufacturing was a greater and greater part of the economy. Once we got into World War II, the US became the number one economy since all of our potential competitors were essentially bombed back into the Bronze Age. There is a reason that most economists only refer to things ‘since World War II’ because our world changed pretty dramatically after that war. The US was the only extant industrial power for about five years after the war. We have never completely surrendered the title of world’s largest economy, though we may forfeit it here someday. Even in our current state of consumerism, we are still the world’s number one manufacturer of a surprisingly long list of goods.
But, back to the story, the US became a serious manufacturing economy in the 1920’s and that continued through the 1960’s at least. In the 1970’s, we changed as manufacturing became far less important and we began evolving into a service economy. Today, services and consumption dominate our economic numbers. 70% of our economy is consumption of goods and services. We import a decent percentage of all those goods, but virtually all the services are domestically produced, we even export a lot of services. We are the number one post-industrial economy. While most other economies vie to replace us as the number one manufacturing economy, we’ve moved on. Several of the European economies are also modestly services, so there is some competition. But, we are by far the most service driven economy today.
Where is all this taking us? Well, back to our long-standing assertion that recessions in this country aren’t that common, nor are they all that severe relative to history. Before 1870, the US economy spent just about half it’s time not growing. We were only growing about half the time and we weren’t about half the time. Productivity in agriculture was sporadic, but meaningful at times. Once we discovered manufacturing, our economy made a quantum leap into a new phase. While we still had recessionary periods, they came less frequently and the periods of growth were longer and had higher growth. From the roughly 1.5% long-term growth rate before 1870, the rate of growth of the economy leapt to 2.5% from 1870 to 1900 and we spent only about a third of our time not growing.
Growth was huge from 1900 to 1929 due to wars and other exogenous factors. We had fewer recessions and longer bouts of growth. That whole period and the 1930’s were just too unique to mean anything really. So, let’s pick up the story after WWII. From 1945 until 1975 the US experienced a recession about once every four years and they lasted about a year on average. We’re down to 25% recessions and 75% growth. The economy grew at about 3.5% over that whole period. From 1976 to 2005 we had only four recessions and three of those were pretty darned ‘lite’. Being in recession only four years out of thirty means we’re down to only 13.3333% recession time over the past thirty years and growth was still 3.5% compounded. It truly was a golden age.
Most economists, when they speak to the growth potential of our economy, would argue that we can grow 3.5% because we have roughly 1.5% population growth and have averaged 2.0% productivity growth over a long time. Looking at history through this simple formula, we see that the period before 1870 could have gotten much higher economic growth. Population growth was more like 3% than 1.5% but there was little productivity enhancement, but some. We could have grown 3.5% but we didn’t. After 1870, population growth actually increased to more than 4% due to better healthcare, lower infant mortality, and increased immigration. Productivity increases were routine and added to potential growth. But, we didn’t manage to grow the 5% or better we could have. After WWII, we still had population growth (baby boom) and improving productivity and could have gotten more growth than we did. Only after 1975, did we get nearly every drop of growth out of our economy that we could.
In the future, we are not likely to have the population growth that we have now. Were it not for immigration, there would be hardly any population growth in the US at all. If we only get 2% economic growth, we’ll really have to be careful of recessions. But, for now, we have 3% potential growth that we are certainly not achieving today. Someday, we will return to growth near potential and with most segments of the economy contributing. This will happen largely because the people who populate those segments will do everything in their power to grow their businesses. We aren’t going to achieve growth because of the mandate of the government. No matter how many dollars they throw our way, it is up to us to pick up those dollars and make them count.
Good News
Australia cut their interest rates to 3%, down from 7.5% less than a year ago.
Wells Fargo let it slip that they expect to show record profits in the first quarter. Hasn’t your pundit been arguing that with very low short rates and higher long rates most banks would be in an enviable position once the write-down subsided? This is the proof. Wells is profiting from being one of the few banks that has been uninterruptedly open for business through this whole miasma. They are writing refis like they are going out of style along with taking over business lines that weaker competitors have shunned due to the commitment of capital that requires.
Economic Numbers
Did we actually have any economic numbers last week? There must have been some, but in our amazement that stocks could go down, we didn’t note any. Clearly, there weren’t any that were particularly good, or we’d have noted them in Good News above. Look on the bright side, you don’t have to skim through this section to see if there was anything interesting.
Weekly Stuff
After a weak start, the market decided that the Wells news was as good an excuse as they needed to move back higher again. The full week’s change wasn’t all that dramatic, but it was positive and all of it occurred on Thursday. Then, luckily we didn’t come back to test that gain on Friday as the stock market was closed for Good Friday. We did manage to rebound from the worst levels of the day each day before Thursday, which shows a little determination by the bulls. This rally may yet be seriously tested, but that day can wait so far as we’re concerned.
Most foreign markets were closed on Friday, but most of Asia was open for business. Many of those markets saw continued gains.
US bond markets were open on Friday, but activity was light. For the week, most segments of the bond market were higher.
Foreign bonds suffered from a higher dollar but the domestic markets were generally higher.
Real estate securities were higher, following financial shares. The gains in real estate related stocks have been particularly dramatic as we have rallied lately. This has prompted several REITs to offer shares to the public in hopes of bolstering their balance sheets.
Commodity prices were generally higher. The energy segment followed crude oil higher. Precious metals were generally higher. Agricultural commodities were mixed and industrial minerals were mostly higher.
Schroeder Financial Services, Inc.
Karl Schroeder
480-895-0611