1st Quarter 2016: Chopping Wood

CHOPPING WOOD

My father sent me a text message on the occasion of his seventy-seventh birthday. He attached a picture of his dog, Jackson, sitting beside a large stack of perfectly-split red oak firewood. Dad’s old weathered ax leaned against the stack of wood. His text merely said, “Jackson and I cut, split and stacked this load of firewood today to celebrate my 77th birthday.” Not included in the text but certainly implied was the question, “What did you do today, son?” I read his message while positioned comfortably in my leather chair at my desk in my climate-controlled office. His message had the desired effect; I couldn’t help but feel like a lazy, spoiled, privileged and unworthy child, relaxing in comfort while my seventy-seven year old father was out on a cold February day cutting down a tree and splitting wood by hand. I’m sure he’ll read this with great pleasure. Sigh. Perhaps you have endured similar “motivation” from your father or mother from time to time.

Like most folks his age (and heck, my age!), Frank Bragg has battled his share of health hurdles. Whether sore knees, injured shoulders, loss of hand strength, limited vision or other ailments, he has dealt with the inconvenience and figured out a way to keep plugging along. “Plugging along” probably understates the man’s pace; he routinely wears me out when we work together on the farm. He doesn’t like to talk about getting older but I can tell that he is decidedly not a fan. A few years back he broke his arm when a cedar tree snapped back on him while he was clearing trails on the tractor. I got a real kick out of watching his reaction when friends would see him in a cast and shoulder sling and ask, “Oh Frank, did you have a fall?” It infuriated him. When I recall that Dad’s mother lived to 93 and his father lived to 101, I figure I have a lot more years of receiving his motivational text messages. I’m counting on it.

Dad’s resilience is similar to the resilience of the US economy. In the face of global weakness, carnage in the energy industry, weak corporate investment, flat corporate earnings, a strong dollar, the drumbeat of negativity from presidential candidates and threats from terrorism, the US economy continues to create jobs and expand. On Friday April 1, the labor department reported that US employers added 215,000 jobs in the month of March, the 73rd consecutive month of positive job creation. Hiring was fairly broad-based across economic sectors, with only mining and manufacturing showing declines. Wage gains, which have been scarce since the recession, saw a slight uptick during the month and for the twelve months ending in March, wages increased by 2.3% after inflation. Finally, the labor-force participation rate inched up slightly to 63% after hitting a 39-year low of 62.4% last September. More on this in the next section.

Not everything is rosy. As we have discussed before, the pace of economic growth during this expansion has been far below the pace of growth during past expansions. Many of the jobs created have been part-time or lower-paying positions and as mentioned above, many discouraged workers have dropped out of the labor force. But despite the negatives, the US economy is working its magic. This is nothing new. During my lifetime (48 years), real GDP (US economic output adjusted for inflation) increased from $4.5 trillion to $16.5 trillion. On a per capita basis (considering population growth) real GDP increased from $22,000 to $51,000. Remarkably, over the last twenty years, which included the bursting of the technology bubble and the financial crisis, real GDP per capita increased from $38,000 to $51,000, an increase of $13,000 per person or 34%. Had the increase been distributed equally (it wasn’t, but I think you’ll see my point), a family of four would have seen household income increase by $52,000 over the twenty-year period ($13,000 multiplied by four). Again, these figures are adjusted for inflation. Even during the Great Recession, the economy proved amazingly resilient. Economic output only declined by 3.4% from its peak of $14.9 trillion in 2007 to its low of $14.4 trillion in 2009 before resuming its upward march to $16.5 trillion in 2015. I don’t know about you, but when I think about the dark days of late 2008 and early 2009, I find it astounding that our economic output shrank by only 3.4% during this period. It seemed so much worse! (You can easily find all of this data and much more for free at the website of the St. Louis Federal Reserve Bank).

I think you’ll agree that the economic figures are interesting if not amazing. The US economy is a powerful force! And remarkably, economic growth happens by evolution. Rather than being the result of some grand plan, economic growth and prosperity evolve through the collective actions of individual market participants. In his 1776 book, The Wealth of Nations, Scottish economist Adam Smith described the “Invisible Hand” of a free market system in which an individual acting to maximize his own gain must exchange what he owns or produces with others who sufficiently value what he has to offer. In this way, by division of labor and a free market, the public interest is advanced. Said another way, when we each act in our own self-interest, society as a whole is better off. It is not the central planning of the government or the interest rate policy of the Federal Reserve Bank that create prosperity. History has shown that planned economies (the USSR, Cuba, North Korea, Venezuela and China to name a few) and excessive government regulation have the effect of stifling or destroying the wealth-creating magic of the free market. While obviously there is a place for government policies and regulations to protect the populace and promote the public good, the free market remains the powerful engine that has reliably driven our economy for centuries.

We’ll need some free-market magic in the years ahead. We’ve written on numerous occasions about the challenges we face with the Federal budget. According to the non-partisan Congressional Budget Office (CBO), by the year 2019, entitlements, defense and interest on the Federal debt will consume all tax revenue collected. Any spending beyond those items will require the United States to add to its growing pile of debt (now almost $20 trillion). Within ten years, our annual deficits are projected to balloon to $1.3 trillion (almost 5% of projected GDP) from the current level of $400 billion (2.5% of current GDP). The CBO projections assume the economy avoids recession and continues to grow at its current pace, that unemployment remains low, that inflation is benign and that interest rates remain low. There are a lot of feel-good assumptions there. Lob in an expensive war, spiking interest rates, unexpected inflation or one of Donald Rumsfeld’s “unknown unknowns” and we may find ourselves with a big hole in the fence.

The path is obviously not sustainable and there will be some tough choices in our future. Depending on the political party, our current candidates (Hillary, Bernie, The Donald, Cruz, Kasich?) are promising higher taxes and more spending or lower taxes and less spending. None of the math works. Reality calls for a combination of higher taxes and lower spending and none of the candidates seem to suggest this path…why make everyone mad, I guess? We’ll write more about politics (carefully) in July and October when things have really heated up.

In the interim and in the long term, we’ll remain optimistic that the economy will have the resilience to grow through the challenges coming our way, creating the prosperity to move us forward. 240 years of history make a strong case that one shouldn’t bet against America. In the unlikely event that we’re wrong and our best days are behind us, you can find me on the farm chopping wood with my dad. Maybe you can grow some vegetables. We can trade with one another and have our own little economy.

On behalf of everyone at Bragg Financial, thank you for choosing us for your financial planning and investing. Enjoy your spring!