This is Common Cents for January 12, 2018

January 12, 2018, by John Norris

Section I

Today, I went to a lunch presentation on Alabama’s economy. Years ago, I was somewhat involved in the sponsoring group, and I have decided to start going again, at least occasionally. Laughingly, there are only so many economic presentations I can sit through in a given year. In case you were wondering, that is more paradoxical or oxymoronic than it is ironic. Just saying.

I will cut to the quick: the presenter, who always has a lot of good information, pretty much had the same forecast/opinion as I have had for a long time. Let me paraphrase, and I am going to put it into quotations even if I might not have to do so:

“Alabama’s manufacturing base is relatively healthy, although increasingly concentrated, but it can’t make up for the overall lack of higher paying job growth across the state since the end of the last recession. Of particular note is the small and shrinking ‘information’ sector, which includes both communications and high technology. These/this sector generally requires a higher level of both education and training, and Alabama lags behind the national average for both. Not surprisingly, those geographic areas of the state with more highly educated workforces have performed better than the rest, and mostly in line with the remainder of the US.”

This isn’t or shouldn’t be terribly illuminating. There is a positive correlation between the skill set of the local workers and the economic output in any one location. So much so, here is my broad, almost foolproof, forecast for the Alabama economy for the foreseeable future: “on average, slightly less than the national average as a whole.” That doesn’t mean we won’t outperform in any given year or two; it is just a general trend due to the nature of both our workforce AND local economy, which is relatively ‘old’ by comparison with more rapidly growing states.

Hey, this doesn’t mean we are bad people or woefully ignorant; not in the slightest. There are a lot of very creative folks and innovative things happening all around our state. However, it does mean we shouldn’t scratch our collective head when our economic growth isn’t as robust as we would like. Where the rubber meets the road and when the dust settles, a productive workforce is a key part of any healthy economy. Every study and data point I have ever read or seen suggests, if not screams, high levels of training and education will ultimately lead to greater worker productivity. Period, and I mean end of discussion.

For grins, I have gone through all the necessary information from the NEA regarding expenditures per student, etc., and you want to know something? Alabama isn’t as bad as you might think. In truth, as a percent of per capita income, our state spends a lot on education, at least relatively. For instance, in 2016, ‘current expenditures for public K-12 schools per student in fall enrollment ($)’ were $9,206. This was good enough to rank 38th in the country. By comparison, our per capita income would place Alabama in the bottom 5. As a result, get a load of this, Alabama was 11th in the US in terms of ‘state and local government expenditures for all education per $1,000 of personal income’ in 2014.

So, interestingly enough, Alabama seems to have made a better commitment to education than the casual observer might think. We are spending a higher percent of our state & local budgets on education and our personal income than the majority of the country. The problem is our per capita income is well below the national average.

What a surprising conundrum, and who would have thought it? It isn’t that Alabamians aren’t funding education at a relatively high percent of the collective wallet, no, because they are. However, given ‘our’ students standardized test results (as reported on, it would seem we aren’t getting very good results for the money. Is this a societal issue or an inefficient delivery of educational services? Is it some combination of the two? As with most things like this, it is probably the latter. I just don’t know what the percentages would be.

So, this is what we know or strongly believe to be true:

  • On average, there is a positive correlation between education, training, and productivity.
  • There is a positive correlation between productivity and per capita economic output.
  • There is a positive correlation between economic output and income.
  • Alabama spends more than the national average per $1,000 in per capita income on overall education than the national average.
  • Alabama students’ standards test scores are significantly less than the national average, in aggregate.

Make no mistake about it: Alabama has a long way to go before its workforce is as highly trained as, say, Washington’s or Connecticut’s. However, we should be getting more for our money than results, at least what says are the results. It doesn’t matter who is to blame in the past, let’s correct this for the future.

If we can, stronger economic growth should follow, and the economic presentations I sit through will be far more sanguine than the one today.


Section II

Another week, another week of bodacious stock returns. Thus far, 2018 has been stockalicious, or something along those lines. I can’t keep up with the lingo.

Now, we were calling for a decent year in the markets, but the first two weeks have been surprisingly strong. If next week is like the first two, we will get all of 2018’s return, or the vast majority of it, before the end of January. Obviously, that means we could be in for some, um, chop moving forward.

With such strength comes the question: “how much longer can this last? When is it finally going to fall apart?” This is a relatively thinly veiled way of saying/asking: “I am scared to death of another 2008, or even 2002, and it feels like déjà vu all over again. Tell me that isn’t going to happen, right?”

Fortunately, as I type, there is nothing in the tea leaves, the magic 8-ball, or the horizon which would suggest the markets are ‘in for’ a prolonged period of distress. Put another way: I don’t foresee another 2008 happening in 2018.

With that said, this is what I told someone this week in response to the question currently on everyone’s mind:

“This might initially seem like an equivocation, but it really isn’t. I have to ask: what do you mean by market sell-off? If by 40-50% like 2008, I don’t see that happening just because. The economy is growing and the yield curve is still positively sloped. But 5%? Could you live with 5%? While we certainly aren’t calling for that at this time, that is a far more likely calendar year sell-off than 40%. At this time, I would put this year’s range between -3% and 12%, with a 7-9% estimate being the low-hanging fruit. If you can live with the outside potential of a negative 3% year, there is no need to make any drastic changes to your asset allocation.”

If this section seems vaguely familiar to last week’s, it is. However, for all intents and purposes, this week looked a lot like last week: a stock market much stronger than the reasonable economic data would suggest. At some point it will slow down or cool off, but perhaps we should enjoy it while it lasts.


Have a great weekend.