The Stock Market Rally That Makes You Poorer

Update: Stocks are up big on today's employment report. In fact, Americans worked less in April than in March: multiply the increase in payrolls by the decline in hours worked, and the total number of working hours fell. Almost all the increase in employment was in retail, hospitality and temp agencies, and probably reflects employers spreading the work around a larger number of workers working fewer hours in order to save on health benefits.

Just after Obama's re-election we heard Republican leaders explain that Obama had just gotten lucky -- the economy was in the recovery phase of a normal business cycle, and Obama caught the right wave. As the stock market rallied through the first four months of 2013 and regained its old peak, the story seemed credible -- until a couple of weeks ago, that is.

We've had one depressing economic report after another. Employment is barely growing, according to the ADP survey, which showed just 119,000 new jobs created in April and 118,000 in May. The April purchasing managers' index for manufacturing fell sharply from 54.6 to 52.1 (50 is dead in the water).

The Shadow Government Statistics website calculates the true unemployment rate -- the proportion of the working-age population that can work but doesn't -- at 23%. That includes so-called "long-term discouraged workers" not included in the labor force. Even the government's own broad measure of unemployment still stands at almost 15%, twice the pre-crisis level.

On a GDP basis, the economy grew at an 0.8% rate in the fourth quarter of 2012 and at a 2.5% in the first quarter. That's just 1.5% without counting inventories. Investment in industrial equipment actually fell during the quarter. It's an economy that is flying barely above stall speed.

No, Obama didn't win re-election because the vote happened to occur at the cusp of a normal business cycle recovery. The economy really is that bad. So is Obama. Sadly, so was the Republican ticket.

Why is the economy so bad? According to the usual chatter, it's because payroll taxes went up and took $140 billion out of personal income during the first quarter. But another big category of personal income -- receipts on assets -- fell by $125 billion, a hit to personal income almost as big as payroll taxes. And almost all of that was due to lower dividends. It turns out that companies are paying a lot less cash out to stockholders. The S&P 500 dividend per share fell from about $9 to about $8 during the first quarter, and the GDP data indicate that drop occurred throughout the corporate world.

Another sign of economic weakness is that the sales of S&P 500 companies fell by 5% during the quarter. Profits per share, though, were higher. How is the stock market managing to levitate above a busted economy, where the sales growth of top companies can't even keep up with nominal GDP? Part of the reason is leverage.