As the U.S. government shutdown was prolonged, not only was there noise about getting away from the U.S. dollar, but also about what happens to the U.S. economy next. On one hand, there was a consensus that the U.S. government shutdown was actually a good thing, serving as a cost-cutting measure that allowed the government to save money. On the other hand, there were those who said it was impacting the U.S. economy’s recovery process and would wipe a certain percentage off the U.S. economy’s gross domestic product (GDP).
Both sides had a solid argument to prove their point about the impact of the U.S. government shutdown on the U.S. economy, but my stance differs from that of both groups. Before going into the details, be aware that we don’t know the exact impact of the shutdown just yet, because the economic data has not been released, but time will eventually draw a better picture.
So what’s my take on the U.S. government shutdown that happened for 16 days? Forget the shutdown; it didn’t matter. What I am concerned about is the other dismal trends that continue to remain in the U.S. economy. If they are not fixed or their direction doesn’t change, then economic growth in the U.S. economy becomes very doubtful.
One of the trends I have been closely following is the unemployment in the U.S. economy. I agree that the number on the surface, the unemployment rate, looks much better than what it was during the financial crisis. However, when I assess and analyze the details, it’s not looking very good.
What you want to see are Americans getting better-paying jobs; once this happens, they will have disposable incomes, which promotes consumer spending. Sadly, they are just not getting those. We are seeing a significant amount of jobs creation in the low-wage-paying sectors of the U.S. economy, but not in sectors like construction and mining, where wages are better.
On top of all this, those who are unemployed in the U.S. economy are staying out of work for much longer than usual. For example, in September, the average duration of unemployment was 36.9 weeks; this means that those who are unemployed are off work for an average of more than nine months. In early 2009, this number stood at 20 weeks. (Source: “Average (Mean) Duration of Unemployment (UEMPMEAN),” Federal Reserve Bank of St. Louis Economic Research web site, last accessed October 23, 2013.)
Unfortunately, what many are not focusing on is that as Americans remain unemployed longer, they will begin to forget and lose their skills. This results in them having an even harder time finding jobs in the future. In addition, once a person is unemployed for an extended period, they risk having to give up unemployment claims and any savings they may have accumulated.
When I look at this, I have to wonder if all the effort we have seen by the Federal Reserve and the government was useful or not.
I don’t think the recovery in the U.S. economy that we have been hoping for since the financial crisis will occur by printing money. If there had been some progress, we would have these anemic trends turning into healthy ones by now; currently, they remain on the same trajectory.
As a result, I continue to watch key stock indices very carefully, as they seem to be running ahead of reality. Investors have to keep in mind the quote of John Maynard Keynes: “The market can stay irrational longer than you can stay solvent.” This may be the case now. Follow irrationality, but be very careful at the same time.
This article Is Following Irrationality the New Trade Strategy? by Mohammad Zulfiqar, BA was originally published at Daily Gains Letter