The Dow Jones Industrial Average and the Labor Force Participation Rate from Ronald Reagan to Barack Obama

Posted by PITHOCRATES - February 10th, 2014

Economics 101

(Originally published May 21st, 2013)

The DJIA and the Labor Force Participation Rate tell us how both Wall Street and Main Street are Doing

Rich people don’t need jobs.  They can make money with money.  Investing in the stock market.  When you see the Dow Jones Industrial Average (DJIA) increasing you know rich people are getting richer.  Whereas the middle class, the working people, aren’t getting rich.  But they may be building a retirement nest egg.  Which is good.  So they benefit, too, from a rising DJIA.  But that’s for later.  What they need now is a job.  Unlike rich people.  The middle class typically lives from paycheck to paycheck.  So more important to them is a growing job market.  Not so much a growing stock market.  For the middle class needs a day job to be able to invest in the stock market.  Whereas rich people don’t.  For a rich person’s money works enough for the both of them.

So the Dow Jones Industrial Average shows how well rich people are doing.   And how well the working class’ retirement nest eggs are growing for their retirement.  But it doesn’t really show how well the middle class is living.  For they need a job to pay their bills.  To put food on their tables.  And to raise their families.  So the DJIA doesn’t necessarily show how well the middle class is doing.  But there is an economic indicator that does.  The labor force participation rate.  Which shows the percentage of people who could be working that are working.  So if the labor force participation rate (LFPR) is increasing it means more people looking for a job can find a job.  Allowing more people to be able to pay their bills, put food on their tables and raise their families.

These two economic indicators (the DJIA and the LFPR) can give us an idea of how both Wall Street and Main Street are doing.  Ideally you’d want to see both increasing.  A rising DJIA shows businesses are growing.  Allowing Wall Street to profit from rising stock prices.  While those growing businesses create jobs for Main Street.   If we look at these economic indicators over time we can even see which ‘street’ an administration’s policies favor.   Interestingly, it’s not the one you would think based on the political rhetoric.

Wall Street grew 75% Richer under Clinton than it did under Reagan while Main Street grew 65% Poorer

Those going through our public schools and universities are taught that capitalism is unfair.  Corporations are evil.  And government is good.  The Democrats favor a growing welfare state.  Funded by a highly progressive tax code.  That taxes rich people at higher tax rates.  While Republicans favor a limited government.  A minimum of government spending and regulation.  And lower tax rates.  Therefore the Republicans are for rich people and evil corporations.  While the Democrats are for the working man.  Our schools and universities teach our kids this.  The mainstream media reinforces this view.  As does Hollywood, television and the music industry.  But one thing doesn’t.  The historical record (see Civilian Labor Force Participation Rate and Recessions 1950-Present and Dow Jones Industrial Average Index: Historical Data).

DJIA vs Labor Force Participation Rate - Reagan

The Democrats hated Ronald Reagan.  Because he believed in classical economics.  Which is what made this country great.  Before Keynesian economics came along in the early 20th Century.  And ushered in the era of Big Government.  Reagan reversed a lot of the damage the Keynesians caused.  He tamed inflation.  Cut taxes.  Reduced regulation.  And made a business-friendly environment.  Where the government intervened little into the private sector economy.  And during his 8 years in office we see that BOTH Wall Street (the Dow Jones Industrial Average) and Main Street (the labor force participation rate) did well.  Contrary to everything the left says.  The DJIA increased about 129%.  And the LFPR increased about 3.4%.  Indicating a huge increase of jobs for the working class.  Showing that it wasn’t only the rich doing well under Reaganomics.  The policies of his successor, though, changed that.  As Wall Street did better under Bill Clinton than Main Street.

DJIA vs Labor Force Participation Rate - Clinton

Despite the Democrats being for the working man and Bill Clinton’s numerous statements about going back to work to help the middle class (especially during his impeachment) Wall Street clearly did better than Main Street under Bill Clinton.  During his 8 years in office the LFPR increased 1.2%.  While the DJIA increased 226%.  Which means Wall Street grew 75% richer under Clinton than it did under Reagan.  While Main Street grew 65% poorer under Clinton than it did under Reagan.  Which means the gap between the rich and the middle class grew greater under Clinton than it did under Reagan.  Clearly showing that Reagan’s policies favored the Middle Class more than Clinton’s policies did.  And that Clinton’s policies favored Wall Street more than Regan’s did.  Which is the complete opposite of the Democrat narrative.  But it gets worse.

The Historical Record shows the Rich do Better under Democrats and the Middle Class does Better under Republicans

The great economy of the Nineties the Democrats love to talk about was nothing more than a bubble.  A bubble of irrational exuberance.  As investors borrowed boatloads of cheap money thanks to artificially low interest rates.  And poured it into dot-com companies that had nothing to sell.  After these dot-coms spent that start-up capital they had no revenue to replace it.  And went belly-up in droves.  Giving George W. Bush a nasty recession at the beginning of his presidency.  Compounded by the 9/11 terrorist attacks.

DJIA vs Labor Force Participation Rate - Bush

The LFPR fell throughout Bush’s first term as all those dot-com jobs went away in the dot-com crash.  Made worse by the 9/11 attacks.  As all the malinvestments of the Clinton presidency were wrung out of the economy things started to get better.  The LFPR leveled off and the DJIA began to rise.  But then the specter of Bill Clinton cast another pall over the Bush presidency.  Clinton’s Policy Statement on Discrimination in Lending forced lenders to lower their lending standards to qualify more of the unqualified.  Which they did under fear of the full force and fury of the federal government.  Using the subprime mortgage to put the unqualified into homes they couldn’t afford.  This policy also pressured Fannie Mae and Freddie Mac to buy these toxic subprime mortgages from these lenders.  Freeing them up to make more toxic loans.  This house of cards came crashing down at the end of the Bush presidency.  Which is why the DJIA fell 19.4%.  And the LFPR fell 2.1%.  Even though the economy tanked thanks to those artificially low interest rates that brought on the subprime mortgage crisis and Great Recession both Wall Street and Main Street took this rocky ride together.  They fell together in his first term.  Rose then fell together in his second term.  Something that didn’t happen in the Obama presidency.

DJIA vs Labor Force Participation Rate - Obama

During the Obama presidency Wall Street has done better over time.  Just as Main Street has done worse over time.  This despite hearing nothing about how President Obama cares for the middle class.  When it is clear he doesn’t.  As his policies have clearly benefited rich people.  Wall Street.  While Main Street suffers the worst economic recovery since that following the Great Depression.  So far during his presidency the LFPR has fallen 3.7%.  While the DJIA has risen by 86%.  Creating one of the largest gaps between the rich and the middle class.  This despite President Obama being the champion of the middle class.  Which he isn’t.  In fact, one should always be suspect about anyone claiming to be the champion of the middle class.  As the middle class always suffers more than the rich when these people come to power.  Just look at Venezuela under Hugo Chaves.  Where the rich got richer.  And the middle class today can’t find any toilet paper to buy.  This is what the historical record tells us.  The rich do better under Democrats.  And the middle class does better under Republicans.  Despite what our schools and universities teach our kids.  Or what they say in movies and television.

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The Dow Jones Industrial Average and the Labor Force Participation Rate from Ronald Reagan to Barack Obama

Posted by PITHOCRATES - May 21st, 2013

History 101

The DJIA and the Labor Force Participation Rate tell us how both Wall Street and Main Street are Doing

Rich people don’t need jobs.  They can make money with money.  Investing in the stock market.  When you see the Dow Jones Industrial Average (DJIA) increasing you know rich people are getting richer.  Whereas the middle class, the working people, aren’t getting rich.  But they may be building a retirement nest egg.  Which is good.  So they benefit, too, from a rising DJIA.  But that’s for later.  What they need now is a job.  Unlike rich people.  The middle class typically lives from paycheck to paycheck.  So more important to them is a growing job market.  Not so much a growing stock market.  For the middle class needs a day job to be able to invest in the stock market.  Whereas rich people don’t.  For a rich person’s money works enough for the both of them.

So the Dow Jones Industrial Average shows how well rich people are doing.   And how well the working class’ retirement nest eggs are growing for their retirement.  But it doesn’t really show how well the middle class is living.  For they need a job to pay their bills.  To put food on their tables.  And to raise their families.  So the DJIA doesn’t necessarily show how well the middle class is doing.  But there is an economic indicator that does.  The labor force participation rate.  Which shows the percentage of people who could be working that are working.  So if the labor force participation rate (LFPR) is increasing it means more people looking for a job can find a job.  Allowing more people to be able to pay their bills, put food on their tables and raise their families.

These two economic indicators (the DJIA and the LFPR) can give us an idea of how both Wall Street and Main Street are doing.  Ideally you’d want to see both increasing.  A rising DJIA shows businesses are growing.  Allowing Wall Street to profit from rising stock prices.  While those growing businesses create jobs for Main Street.   If we look at these economic indicators over time we can even see which ‘street’ an administration’s policies favor.   Interestingly, it’s not the one you would think based on the political rhetoric.

Wall Street grew 75% Richer under Clinton than it did under Reagan while Main Street grew 65% Poorer

Those going through our public schools and universities are taught that capitalism is unfair.  Corporations are evil.  And government is good.  The Democrats favor a growing welfare state.  Funded by a highly progressive tax code.  That taxes rich people at higher tax rates.  While Republicans favor a limited government.  A minimum of government spending and regulation.  And lower tax rates.  Therefore the Republicans are for rich people and evil corporations.  While the Democrats are for the working man.  Our schools and universities teach our kids this.  The mainstream media reinforces this view.  As does Hollywood, television and the music industry.  But one thing doesn’t.  The historical record (see Civilian Labor Force Participation Rate and Recessions 1950-Present and Dow Jones Industrial Average Index: Historical Data).

DJIA vs Labor Force Participation Rate - Reagan

The Democrats hated Ronald Reagan.  Because he believed in classical economics.  Which is what made this country great.  Before Keynesian economics came along in the early 20th Century.  And ushered in the era of Big Government.  Reagan reversed a lot of the damage the Keynesians caused.  He tamed inflation.  Cut taxes.  Reduced regulation.  And made a business-friendly environment.  Where the government intervened little into the private sector economy.  And during his 8 years in office we see that BOTH Wall Street (the Dow Jones Industrial Average) and Main Street (the labor force participation rate) did well.  Contrary to everything the left says.  The DJIA increased about 129%.  And the LFPR increased about 3.4%.  Indicating a huge increase of jobs for the working class.  Showing that it wasn’t only the rich doing well under Reaganomics.  The policies of his successor, though, changed that.  As Wall Street did better under Bill Clinton than Main Street.

DJIA vs Labor Force Participation Rate - Clinton

Despite the Democrats being for the working man and Bill Clinton’s numerous statements about going back to work to help the middle class (especially during his impeachment) Wall Street clearly did better than Main Street under Bill Clinton.  During his 8 years in office the LFPR increased 1.2%.  While the DJIA increased 226%.  Which means Wall Street grew 75% richer under Clinton than it did under Reagan.  While Main Street grew 65% poorer under Clinton than it did under Reagan.  Which means the gap between the rich and the middle class grew greater under Clinton than it did under Reagan.  Clearly showing that Reagan’s policies favored the Middle Class more than Clinton’s policies did.  And that Clinton’s policies favored Wall Street more than Regan’s did.  Which is the complete opposite of the Democrat narrative.  But it gets worse.

The Historical Record shows the Rich do Better under Democrats and the Middle Class does Better under Republicans

The great economy of the Nineties the Democrats love to talk about was nothing more than a bubble.  A bubble of irrational exuberance.  As investors borrowed boatloads of cheap money thanks to artificially low interest rates.  And poured it into dot-com companies that had nothing to sell.  After these dot-coms spent that start-up capital they had no revenue to replace it.  And went belly-up in droves.  Giving George W. Bush a nasty recession at the beginning of his presidency.  Compounded by the 9/11 terrorist attacks.

DJIA vs Labor Force Participation Rate - Bush

The LFPR fell throughout Bush’s first term as all those dot-com jobs went away in the dot-com crash.  Made worse by the 9/11 attacks.  As all the malinvestments of the Clinton presidency were wrung out of the economy things started to get better.  The LFPR leveled off and the DJIA began to rise.  But then the specter of Bill Clinton cast another pall over the Bush presidency.  Clinton’s Policy Statement on Discrimination in Lending forced lenders to lower their lending standards to qualify more of the unqualified.  Which they did under fear of the full force and fury of the federal government.  Using the subprime mortgage to put the unqualified into homes they couldn’t afford.  This policy also pressured Fannie Mae and Freddie Mac to buy these toxic subprime mortgages from these lenders.  Freeing them up to make more toxic loans.  This house of cards came crashing down at the end of the Bush presidency.  Which is why the DJIA fell 19.4%.  And the LFPR fell 2.1%.  Even though the economy tanked thanks to those artificially low interest rates that brought on the subprime mortgage crisis and Great Recession both Wall Street and Main Street took this rocky ride together.  They fell together in his first term.  Rose then fell together in his second term.  Something that didn’t happen in the Obama presidency.

DJIA vs Labor Force Participation Rate - Obama

During the Obama presidency Wall Street has done better over time.  Just as Main Street has done worse over time.  This despite hearing nothing about how President Obama cares for the middle class.  When it is clear he doesn’t.  As his policies have clearly benefited rich people.  Wall Street.  While Main Street suffers the worst economic recovery since that following the Great Depression.  So far during his presidency the LFPR has fallen 3.7%.  While the DJIA has risen by 86%.  Creating one of the largest gaps between the rich and the middle class.  This despite President Obama being the champion of the middle class.  Which he isn’t.  In fact, one should always be suspect about anyone claiming to be the champion of the middle class.  As the middle class always suffers more than the rich when these people come to power.  Just look at Venezuela under Hugo Chaves.  Where the rich got richer.  And the middle class today can’t find any toilet paper to buy.  This is what the historical record tells us.  The rich do better under Democrats.  And the middle class does better under Republicans.  Despite what our schools and universities teach our kids.  Or what they say in movies and television.

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Inventories

Posted by PITHOCRATES - July 23rd, 2012

Economics 101

Before a Business Earns any Sales Revenue they have to Spend Cash to Build an Inventory

To sell something a business needs to have it on hand first.  Because when it comes to manufactured goods we rarely custom manufacture things.  No.  When businesses sell something it’s something they already have in their inventories.  So how do they get things into inventory?  With cash.  Businesses buy goods and place them in their inventories.  They exchange some of their cash for the goods they hope to sell at a later date.  And the bigger the inventory they maintain the more cash it will take.  Cash they have to spend before they sell these goods.  Which requires financing.  Each large business, in fact, has a finance department.  That works to raise cash.  So the businesses can buy inventory (and pay their operating and overhead expenses) before they start selling anything.

This is how the retail stores work.  For manufacturers it’s a little different.  They make things.  Out of other things.  Things that go through various stages of production before becoming a finished good.  So to make these things requires different types of inventories.  Raw goods.  Work in process.  And finished goods.  When they pull raw goods out of inventory and begin working with them they become work in process inventory.  When finished goods come off the final production line they enter finished goods inventory.  The finance department secures the cash to buy the raw materials.  And for the equipment and labor used through the stages of production to produce a finished good.  Which enters finished goods inventory until they sell and ship these goods.

Before a business earns any sales revenue they have to spend huge amounts of cash first to move material through these inventories.  Cash they can’t use for anything else.  Like paying their overhead expenses.  Or servicing their debt.  So it’s a delicate balancing act.  You need inventory to produce revenue.  But if you run out of cash you can’t produce any inventory.  Or pay your bills.  A large inventory creates a large variety of things for customers to buy.  But if customers aren’t buying that large inventory will consume cash leaving a business struggling to pay its bills.  If they become so cash-strapped they will cut their prices to unload slow moving inventory.  Cut back on production rates.  Even cut back on expenses.  As in cost-cutting.  And lay-offs.

Good Inventory Management is Crucial for the Financial Health of a Business

A business doesn’t start generating cash until they start selling their finished goods.  Sales numbers may sound high but most sales revenue goes to pay for the costs of producing inventory.  A firm’s accounting department records these revenues.  And matches them to the cost of goods sold.  Which in a retailer is what they paid to bring those goods into inventory.  A manufacturer may use a term like cost of sales.  Which would include all the costs they incurred throughout the stages of production from bringing raw material into the plant.  To the labor to process that material.  To the energy consumed.  Etc.  Everything that was an input in the production process to place a finished good into inventory.  So from their sales revenue they subtract their costs of goods sold (or cost of sales).  The number they arrive at is gross profit.  Which has to pay for everything else.  Rent, utilities, marketing and advertising, non-production salaries and benefits, insurances, taxes, etc.  And, of course, interest on the cash their finance department borrowed to start everything off.

There is a unique relationship between inventories and sales.  There are countless things that happen in a business but what happens between inventories and sales receives particular attention.  A business’ greatest cost is the cost of goods sold.  Or cost of sales.  Everything that falls above gross profit on their income statement (the financial statement that shows a firm’s profitability).  This cost is a function of inventory.  The bigger the inventory the bigger the cost.  The smaller the inventory the smaller the cost.  This is a direct relationship.  You move one the other follows.  Whereas the relationship between sales and inventory is a little different.  The higher the sales revenue the bigger the inventory cost.  Because you have to have inventory to sell inventory.  However, there is no such corresponding relationship for falling sales.  As sales can fall for a variety of reasons.  And they can fall with a falling inventory level.  They can fall with a steady inventory level.  And they can fall with a rising inventory level.

In business sales are everything.  There are few problems healthy sales can’t solve.  It can even overcome some of the worst cost management.  So rising sales revenue is good.  While falling sales revenue is not.  There are many reasons why sales fall.  But the reason that most affects inventories is typically a bad economy.  When people scale back their purchases in response to a bad economy a firm’s sales fall.  And when their sales fall their inventories, of course, rise.  Until management scales back production to reflect the weaker demand.  Because there is no point building things when people aren’t buying.  Those who don’t scale back production will see their sales fall and their inventories rise.  Creating cash problems.  Because sales aren’t creating cash.  And a growing inventory consumes cash.  Making it difficult to meet their daily expenses.  Such as payroll and benefits.  As well as paying interest on their debt.  Which can lead to insolvency.  And bankruptcy.  So good inventory management is crucial for the financial health of a business.

If Retail Sales are Falling and Inventories are Rising Bad Times are Coming

Businesses target specific inventory levels.  During good economic times they increase inventory levels because people are buying more.  During bad economic times they decrease inventory levels because people are buying less.  And they monitor changes in the actual sales and inventory levels continuously.  Adjusting inventory levels to match changes in sales.  To balance the need to have an inventory flush with goods to sell.  While keeping the cost of that inventory to the lowest level possible.  All businesses do this.  And if you track the aggregate of the inventory levels of all businesses you can get a good idea about what’s happening in the economy.

John Maynard Keynes used inventory levels in his macroeconomics formulas.  The ‘big picture’ of the economy.  Looking at inventories tied right into jobs.  If sales are outpacing inventory levels then businesses hire new workers to increase inventory levels.  So sales growing at a greater rate than inventory levels suggest that businesses will be creating new jobs and hiring new workers.  A good thing.  If inventory levels are growing greater than sales it’s a sign of an economic slowdown.  Suggesting businesses will be reducing production and laying off workers.  Not a good thing.

Because of the stages of production changes in finished goods inventories can create or destroy a lot of jobs.  For if the major retailers are cutting back on inventory levels due to weak demand that will ripple all the way through the stages of production back to the extraction of raw materials out of the ground.  Which makes inventory levels a key economic indicator.  And when we combine it with sales you can pretty much learn everything you need to know about the economy.  For if retail sales are falling and inventories are rising bad times are coming.  And a lot of people will probably soon be losing their jobs.  As the economy falls into a recession.  Which won’t end until these economic indicators turn around.  And sales grow faster than inventories.  Which indicates a recovery.  And jobs.  As they ramp up production to increase inventory levels to meet the new growing demand.

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