The unemployment rate is falling, stock prices are soaring and energy is as cheap as it has been in years, so why does the U.S. economy still feel like it’s on life support?

Kenneth Entenmann, senior vice president and chief investment officer at Norwich, New York-based NBT Bank, offered several reasons for the seeming paradox at a meeting of area business professionals in Portland Tuesday. It’s not really a paradox when you dig a bit under the surface, he said.

 Unemployment is low, but so is wage growth. There is clear evidence that many of the new jobs created since the Great Recession don’t pay as well as those lost during the country’s most recent economic crisis, Entenmann said. Historically, when unemployment drops, wage growth rises. He showed an overlay of unemployment and wage growth over the past 50 years that resembles a wavy line and its reflection in a mirror – at least until about 2010. From that point forward, average wages stagnated even as the unemployment rate was falling. Entenmann said one reason is that many former workers have stopped looking for jobs, which artificially decreases the unemployment rate. Another is that many of the newly created jobs are part time. “We still have fewer full-time jobs today than we did in 2007,” he said.

U.S. stocks in general appear to be overvalued, which could lead to a painful market adjustment. The price-to-earnings ratio for large and mid-cap U.S. stocks, as measured by the MSCI USA Index, is 20.1, compared with 18.5 for non-U.S. companies. The price-to-earnings, or P/E ratio, compares what a company’s shares are selling for with its most recent annual earnings per share. A P/E ratio of 20 means shares are selling for 20 times the most recent year’s earnings per share. At the moment, the P/E ratio of large and mid-cap U.S. stocks is considerably higher than the historical median, although still within the normal range, Entenmann said.

Large corporations are hoarding cash. The S&P 500 companies alone are sitting on a combined $4 trillion that is just “sitting there, earning zero,” Entenmann said. Capital expenditures among publicly traded companies are at an all-time low, he said, even as those companies are earning near-record profits. High cash reserves and low capital expenditures are signs of trepidation in the market. Uncertainty about future interest rate increases, tighter financial regulation, Affordable Care Act costs, volatility of energy prices and reduced profits related to the strong dollar all could be contributors.

There is a shortage of liquidity in the bond market, Entenmann said. Liquidity is the extent to which a market can facilitate the buying and selling of a security without affecting that security’s price. In a highly liquid market, securities can be bought and sold quickly without any significant reduction in price. Entenmann said there is concern among investors that, should market conditions facilitate a widespread sell-off of corporate bonds, their value would plummet because of a lack of investors ready and willing to purchase them. “This is what keeps me up at night,” he said.

Things are not all bad! Despite the current economic challenges, average U.S. household debt is down, the value of retirement investments is up, and the persistence of low oil prices is helping more people than it is hurting, Entenmann said. In general, the U.S. economy still is one of the strongest in a challenging global environment. “We remain the best of the worst economies,” he said.


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