With an exuberant leap, the U.S. stock market has jumped into unknown territory, erasing all of the damage it suffered in the financial crisis.
Too bad the rest of the country doesn’t feel much like celebrating.
After steadily climbing since the start of the year, the Dow Jones Industrial Average on Tuesday rose to a new all-time record close of 14,253.77, smashing through its prior high from October, 2007.
The enthusiasm of investors isn’t hard to understand: stocks offer the prospect of higher returns in a world of ultra-low interest rates and the chance to participate in an era of robust corporate profits.
But the surging prices also underline the gulf between Wall Street and the experience of everyday Americans, who see a recovery that is fundamentally lopsided.
The stellar rise in stock prices is paired with weak expansion in the economy and stubbornly high unemployment. Since the recession ended in 2009, corporate profit has soared but wages have stagnated and household income has declined.
“There is no doubt that the recovery has been more favourable for companies and stockholders than it has been for employees,” said Dan Greenhaus, chief global strategist at BTIG, a trading firm in New York.
When the blue-chip average last hit these lofty levels, unemployment in the U.S. was a mere 4.7 per cent and home prices were still near their all-time highs. Today, the jobless rate is 7.9 per cent and the real-estate market remains 30 per cent below its peak of mid-2006.
In the interim, corporate America has thrived. The profits of U.S. companies have flourished, rising from $1.34-trillion (U.S.) in 2009 to a fresh record of $1.97-trillion last year.
Although the rate of growth has slowed considerably, corporate profit as a share of overall economic output is “extremely high in a historical context,” noted Dean Maki, chief U.S. economist at Barclays Capital. According to figures from the U.S. Federal Reserve, corporate profits as a share of national income are at their highest point since 1950.
While companies made quick work of bouncing back from the recession, the same is not true of their employees. According to the U.S. Census Bureau, the median income for a household, adjusted for inflation, declined to $50,054 in 2011 from $54,489 in 2007.
An abundance of job seekers and a decline in the power of unions means that “the bargaining power of people currently on the payroll and people looking for a job is very, very weak,” said Gary Burtless, a labour economist at Brookings Institution in Washington, D.C.
Cathy McClure, 54, lost her job at a forklift company in 2008 and spent two years out of work before landing a part-time position at a car dealership near her home in Rockford, Illinois. Several months ago, her job switched to full-time – but even then, she is making half of what she did back in 2008.
In her town, a former manufacturing hub, work remains scarce. “Basically if you’re not in retail, you pretty much don’t have a job,” she said. The Dow record was news to her: “Oh yeah?” she remarked, upon learning of Tuesday’s move.
“It is not a pretty picture for the people in the middle income and below middle income,” said Mr. Burtless. The price of their main asset – their home – has yet to recover, while wage growth remains scant, he said.
Gains from a rising stock market, meanwhile, accrue primarily to those in the upper reaches of the income ladder. Higher share prices do make people feel wealthier, however, which will help spur consumer spending.
“Unless firms are profitable, they’re not going to hire anybody, so that’s not a bad thing,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative think tank in Washington, D.C., and a former economic advisor to Republican presidential candidate John McCain. “The question is when will the labour market pick up.”