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Often there is a disconnect between people’s own experience of something and how they think the thing is doing in general. Sometimes you see this with the NHS: people will praise the NHS and treatment they received personally whilst still thinking the NHS overall is going to hell in a handbasket. I think you can also see some of this attitude in today’s economy. By historical standards we are doing pretty well (and I think we are doing miraculously well given the interest rate shock we have all just received). Yet I meet plenty of gloomy people on my travels. I have some theories as to why this is, but this week I saw a couple of data points that may help with some of the explanation.
The first is that I generally spend more of my time in a bubble of relatively well-off people. What has been interesting (and great!) in the post-Covid era is that lower earners have generally done better (in terms of relative wages) than the better off. The recent annual National Living Wage increase of 9.8% is an example of this. Vanguard have also shown that (in the US at least) hiring rates for middle and top earners are falling, while at the same time remaining strong for lower income workers. It looks like while the economy is strong as a whole, it is less strong for the middle and top earners. Falling hiring rates for students leaving university is probably a similar story.
This may also be the start of AI technologies lowering the demand for new skilled workers. I’d expect this effect to be small but, equally, we are at the very early stages of the AI revolution. Rising equity markets (driven by AI winners) and a worsening job market might be (in the short term at least) two sides of the same coin.
The second chart that caught my eye was from Simon French (the chief economist at Panmure Gordon). This shows that nearly all the run up in UK house prices since 1998 (after adjusting for inflation) happened before 2008. A lot of UK people have a lot of their wealth tied up in their main residential property. And this hasn’t really made them any money since 2008. (Or, to put it differently, inflation has eaten away at the gains they have made.)
This actually gives me some comfort. Bubbly housing markets can be a major cause of financial instability (as we saw of course in 2008). And I have long been worried that excess planning red tape and a culture of NIMBYism means we are not building enough homes in the UK today. But flat real house prices (in a 15-year period when the UK population has increased by around 6 million) suggests otherwise. Bubbles are fun while they last but the hangovers can take away all the gains and more. I think I prefer today’s gloomier environment coupled with low unemployment rates to more go-go periods (like Tony Blair and the mid-noughties housing boom). And I hope that we can carry on like this (or better) for a while yet.
Chris Brown, CIO
cbrown@ipscap.com
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