(Bloomberg Opinion) — The stock market is often misused as a bellwether for the economy, especially in political debates. Yet the market has never reliably moved in concert with the economy. And today the connection between the two is weaker than at any point since World War II. The reasons for this disconnect, furthermore, suggest the relationship will loosen even further in years ahead.
One major reason the correlation between equity markets and real economic activity has never been particularly strong is that stock prices are driven by expectations about future, not current, economic conditions, and they can also be significantly influenced by changes in the interest rate used to discount future earnings. As the economy has evolved toward services industries such as health care and education, though, and as private equity funds have grown to become a larger force, the stock market has become even less representative of current economic activity.
New research by Frederik Schlingemann of the University of Pittsburgh and Rene Stulz of Ohio State University documents what has happened. In 1973, 41 per cent of private-sector workers in the U.S. were employed by publicly listed firms. By 2019, that share had fallen to 29 per cent percent. And among public firms, employment now plays a smaller role than it once did in explaining market values: In the 1970s, employment differences across companies explained half of the differences in stock market capitalization; they now account for only a fifth of the variation.
What explains the growing gap between stock prices and employment? Schlingemann and Stulz point to sectoral shifts across the economy as being the major driver. Manufacturing companies, with significant physical investment, often turn to equity markets for their substantial financing needs. Services firms are less likely to be publicly listed. Only 4 per cent of workers in education and health services are employed by public firms, compared with more than three-fourths of workers in manufacturing.
U.S. economy heading for V-shaped recovery, but stock market thrill ride also ahead: CFRA’s Stovall
Another round of encouraging data out of the United States has Sam Stovall, chief investment strategist of U.S. equity strategy at CFRA, saying the U.S. economy “is mapping out a V-shaped recovery”, but he also warns investors to prepare for increased market volatility.
Thus, the increasing disconnect between the stock market and jobs is largely a story of the American economy’s shift to services over the past several decades. In 1973, manufacturing employed 30 per cent of workers. Employment in the sector has fallen by more than 2 million people since then, and the share of total employment in manufacturing has declined by almost two-thirds. At the same time, since the early 1970s, employment in education, health services, professional business services, and leisure and hospitality has grown by more than 200 per cent.
If education and health-care firms were as prone as manufacturing companies to tap public equity markets, then listed firms would have represented 43 per cent of all workers in 2019 — slightly more than in 1973. In other words, the shift of employment toward services and away from manufacturing has widened the disconnect between the stock market and the job market.
The mirror image of the public companies’ declining employment share is the rise in private equity. Since 2002, the net asset value of private companies has risen twice as fast as that of public ones, McKinsey estimates. As the number of public companies has fallen in half over the past two decades, the role of private companies has risen.
So what should we expect in the future? The buzz around special purpose acquisition companies, or SPACs, suggests that for many firms the allure of public markets will persist. Overall, though, as people consume more and more health care, education and other services, employment will probably continue to shift toward private companies.
All this raises an interesting question: Do we need new measures of activity among private companies? As the employment share of public companies continues to fall, data from their activities tells us less and less about the broader economy.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Peter R. Orszag is a Bloomberg Opinion columnist. He is the chief executive officer of financial advisory at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
OTTAWA – Finance Minister Chrystia Freeland says the government is making some changes to mortgage rules to help more Canadians to purchase their first home.
She says the changes will come into force in December and better reflect the housing market.
The price cap for insured mortgages will be boosted for the first time since 2012, moving to $1.5 million from $1 million, to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
On Aug. 1 eligibility for the 30-year amortization was changed to include first-time buyers purchasing a newly-built home.
Justice Minister Arif Virani is also releasing drafts for a bill of rights for renters as well as one for homebuyers, both of which the government promised five months ago.
Virani says the government intends to work with provinces to prevent practices like renovictions, where landowners evict tenants and make minimal renovations and then seek higher rents.
The government touts today’s announced measures as the “boldest mortgage reforms in decades,” and it comes after a year of criticism over high housing costs.
The Liberals have been slumping in the polls for months, including among younger adults who say not being able to afford a house is one of their key concerns.
This report by The Canadian Press was first published Sept. 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales rose 1.4 per cent to $71 billion in July, helped by higher sales in the petroleum and coal and chemical product subsectors.
The increase followed a 1.7 per cent decrease in June.
The agency says sales in the petroleum and coal product subsector gained 6.7 per cent to total $8.6 billion in July as most refineries sold more, helped by higher prices and demand.
Chemical product sales rose 5.3 per cent to $5.6 billion in July, boosted by increased sales of pharmaceutical and medicine products.
Sales of wood products fell 4.8 per cent for the month to $2.9 billion, the lowest level since May 2023.
In constant dollar terms, overall manufacturing sales rose 0.9 per cent in July.
This report by The Canadian Press was first published Sept. 16, 2024.
