Oh, the dreams we had in the 1980s, particularly when it came to revitalizing our economy. For those who remember it well (and those who are younger and want to learn how it all went wrong) the great promise of supply side economics was that if we didn’t tax the job creators, they would bring forth more and better-paying jobs. So we implemented tax breaks for corporations and the highest earners and we got back….nothing. Wages stayed virtually flat for nearly 40 years while big companies shipped manufacturing jobs overseas. At the first whiff of an economic downturn, wage workers were the first ones to get pink slips and the boot out the door. Instead of better-paying jobs, the rich got richer and the middle class shrank.
That was the situation until just recently. But the last year and half has brought some unexpected good news. As the labor market tightened, companies started paying more to attract and keep top talent. For the first time since the recovery started, wages and bonuses started to look up. Median middle class wages shot up over five percent between 2014 and 2015, the first big increase since 2007. The economy averaged 200,000 new jobs a month in 2015 and the number of people living in poverty dropped by 3.5 million. As a result, the poverty rate dropped by the largest percentage since 1968, when we were in the midst of the war in Vietnam.
Great News, Bad Timing
The problem? The fear index, called the VIX, is near record highs and the stock market experienced a gut-wrenching drop of more than 200 points. The indexes recovered some and stabilized later in the week but that has not calmed markets. If anything, investors are more on edge now than they’ve been anytime in the last six years. Big investors are selling stocks and bonds and fleeing to the shelter of tangible assets, like gold, silver and commercial property.
Oil Markets
Along with the drop in the stock market we’ve also experienced a drop in oil prices. Why is it bad news that oil prices dropped nearly three percent on the same day the stock market crashed? Because many domestic oil producers borrowed money to start new drilling and oil extraction projects when oil was $100 a barrel. Due to an oil glut, fed mainly by our “friends” in Saudi Arabia, prices are down around forty-five dollars a barrel and many of those small domestic oil companies are barely able to make their loan payments.
Watch For Layoffs
There have already been mass layoffs in the energy sector, though so far those layoffs have been absorbed by the broader economy. But if the market continues downward and stays down for more than a quarter, company executives will turn to layoffs to prop up forward earnings. Layoffs increasing beyond the point that the economy could absorb them would have a devastating and near immediate impact on wages. Layoffs are almost always accompanied by wage freezes and pressure on hiring managers and HR departments to keep a lid on starting salaries and incentives.
So, great news, you got a raise! Bad news, it doesn’t look like it’s going to last. Instead of spending that higher salary on an expensive vacation, it might be a good time to engage in what business calls “deleveraging,” or paying down some of your debt. It’s also a good time to make sure your emergency fund is topped off and your resume is up to date. Waiting until you get laid off is the wrong time to start looking for a job. Networking and making friends in your industry is another thing you can do right now.