Fed has us wearing 'the best of the worst' crown
Last week we received the July unemployment numbers and, of course, the latest payroll data. As always, every pundit and his brother opined on and dissected the most minute movement in the data.
However, what I don't hear said enough in these analyses is the truth: The economy is not cutting it, period.
Every piece of data, from the unemployment and workforce participation rates to the average hourly wage to the U-6 number that shows underemployment, remains a substantial concern.
Depending on whether you're counting from 2007 or 2008, we've had five or six years to recover from the financial crisis. It's now 2013, and the economy is neither where it should be or where it needs to be. Moreover, the growth rates are certainly not going to sustain our position as the world economic leader.
We can't solve the problem if we are not honest about it. With GDP growth still at less than 2 percent last quarter, the economy is limping along at best. The best thing that the economy has going for it right now is that the rest of the world is in various states of disarray, too, so we can temporarily wear the crown of "the best of the worst." That's not a crown that we should wear proudly, and it's not a title we can keep forever.
So why is there an unwillingness to be honest about where we are economically? Well, one answer is that the market has been on fire. But the market is not the economy—and today it has been decoupled from it so much that it's not even a gauge of the economy. That's because the very same Fed intervention that has brought the market from critical care all the way back to life is creating a perverse disincentive that is affecting our true economic recovery.
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The easy-money fest has created a market environment that has allowed companies to be rewarded for increasing earnings, even without a concurrent increase in revenue. Efficiencies have had to boost operating margins, but those efficiencies have also been at the expense of hiring. In many cases, they have been a result of trimming staff.
Cheap capital and well-stocked corporate balance sheets have also allowed for buying back shares to help boost EPS. Not to mention the ability to return more capital to shareholders in the form of dividends, a welcome cash infusion for investors seeking yield in an artificially depressed interest rate environment.
While those maneuvers have boosted bottom lines and propelled the market, they have done so at the expense of revenue growth—that same revenue growth that is critical for GDP growth. While corporate cash is being used for financial engineering and being returned to shareholders, it is not being used to make significant investments, including the hiring that puts cash in consumers' pockets.
Absent this type of corporate investment, consumers will not have the ability to ramp up spending in a way to meaningfully affect economic growth and to see a jump in the GDP.
In addition, these corporate cuts can't go on forever. A public company can cut only so much overhead and buy back so many shares as an EPS growth strategy. It's not a sustainable long-term strategy, which is why the growth-multiple valuations that many companies are receiving are based on quite a bit of smoke and mirrors.
Until the Fed stops the printing press and allows the market to be valued based on the true fundamentals, including viable long-term growth rates, companies are not going to have the incentive to invest and hire—the actions necessary to spur economic growth.
It's past time for the Fed to stop the presses and stop manipulating the market. It's time for the long-term health of not only the market but of the overall economy.
—Carol Roth is a CNBC contributor, the host of WGN radio's "The Noon Show" and best-selling author of "The Entrepreneur Equation." Follow her on Twitter: @CarolJSRoth.