When talking about stock markets, there are three rules you have to remember. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy.
So the market plunge of the past few days might mean nothing at all.
On one side, don’t assume that there was a good reason for the slide (although the fact that the Dow fell 666 points on Friday hints either at satanic forces or at some mystical link with the Kushner family’s bum investment at 666 Fifth Ave. in New York City). When stocks crashed in 1987, economist Robert Shiller carried out a real-time survey of investor motivations; it turned out that the crash was essentially a pure self-fulfilling panic. People weren’t selling because some news item caused them to revise their views about stock values; they sold because they saw that other people were selling.
And on the other side, don’t assume that the stock price decline tells us much about the economic future, either. The great economist Paul Samuelson famously quipped that the stock market had predicted nine of the past five recessions. That 1987 crash, for example, was followed not by a recession, but by solid growth.
Still, market turmoil should make us take a hard look at the economy’s prospects. And what the data say, I’d argue, is that at the very least America is heading for a downshift in its growth rate; the available evidence suggests that growth over the next decade will be something like 1.5 percent a year, not the 3 percent Donald Trump and his minions keep promising.
There are also suggestions in the data that risky assets in general — stocks, but also long-term bonds and real estate — may be overpriced. Leaving bitcoin madness aside, we’re not talking dot-coms in 2000 or houses in 2006. But standard indicators are well above historically normal levels, and a reversion toward those norms could be painful.
About that plummet: If there was any news item behind it, it was Friday’s employment report, which showed a significant although not huge rise in wages. Now, rising wages are a good thing. In fact, the failure of wages to rise much until now has been a deeply frustrating deficiency in the otherwise impressively durable economic recovery that began early in the Obama administration.
But we’re now seeing fairly strong evidence that the U.S. economy is nearing full employment. The low measured unemployment rate is only part of the story. There’s also the growing willingness of workers to quit their jobs, something they don’t do unless they’re confident of finding new employment. And now wages are finally rising, suggesting that workers are gaining bargaining power, too.
Again, this is all good news. But it does mean that future U.S. growth can’t come from putting the unemployed back to work. It has to come either from growth in the pool of potential workers or from rising productivity, that is, more output per worker.
Yet with baby boomers retiring, growth in the U.S. working-age population, especially in prime working years, has slowed to a crawl, while productivity growth has been disappointing. Together, these factors suggest an economy likely to grow only half as fast as Trump promises.