In a new video note to clients, Morgan Stanley economist Ellen Zentner and chief U.S. equity strategist Adam Parker discuss the possibility of trickle-down economics making a comeback in 2014.
“We all remember Reaganomics and the trickle-down effect, and one of the themes for 2014 is: will we see that this year?” asks Zentner.
She cites the well-documented divergence in consumer confidence and consumer spending across income groups: confidence and spending is rising for high-income earners — alongside prices — whereas it’s going nowhere for low-income earners.
“For the trickle-down effect to happen, companies are going to have to start hiring more, because we’re going to have to shift that wealth down to the lower-income households in some way,” says Zentner.
However, Parker doesn’t expect companies to really pick up hiring dramatically any time soon.
“I think demand is not quite strong enough and companies aren’t quite confident enough to have huge head count additions,” he says. “We have seen some growth in the head count year over year. It’s certainly better than the previous few years. But 50% of that growth in jobs has come in the consumer sector — in consumer discretionary and in consumer staples. I don’t know if that’s really going to be sustainable, growing at that rate.”
And if companies don’t hire, that should help provide continued support to corporate profit margins.
“We want margins to stay high — that’s what makes stocks work,” says Parker. “If hiring stays pretty muted, then the market can continue to do well, because one of the things we’re worried about is companies putting costs in place that turn out not to be merited.”