The Enigmatic U.S. Economy

August 12, 2016

U.S. economic data trends span a wide spectrum, hampering analysts from synthesizing current conditions and prospective trends into a coherent direction with strong confidence. Start with the good. Jobs growth in June and July averaged a robust 274K per month, well above the 75-100K needed to avoid a rising jobless rate, which at 4.9% is a shade less than half its last cyclical peak. Another indication of a gradually tightening labor market can be seen in the JOLTS data that monitors hiring, job postings and separations. New weekly jobless insurance claims have averaged 265K over the past half year, which is incredibly low for such a long interval. And on-year growth in average hourly earnings have crept up recently from around 2.0% on year, where such had been stuck for a long time, to 2.6%, which is still only moderate in historical terms. For a business cycle upswing now in its 37th quarter of flight, one would expect greater wage compensation than that.

Real GDP over the last three quarters tells a different story.  GDP in the period advanced at an annualized rate of just 1.0%.  Before the 1.0% pace of growth in the first half of 2016, GDP grew just 2.1% per annum in 2011-15. While considerably better than the growth of most other advanced economies, such was well below U.S. norms in the second half of the 20th century. Growth last quarter remained very unbalanced. Take away the impetus from personal consumption, and GDP fell 1.6%.

Industrial production is only plugging along. While up 0.6% in June, the last reported month, output was merely 0.7% greater than a year earlier, and capacity utilization at 75.4% evidenced quite a bit of remaining slack. Retail sales had been doing better but laid an egg in July with no growth at all.

Some of the enigma can be explained by the bust in labor productivity, which posted sequential quarter-on-quarter drops of 2.4% in 4Q15, 0.6% in the first quarter of 2016 and 0.5% in 2Q16. This is not a new state of affairs. Productivity fell 0.4% between mid-2015 and mid-2016, and sub-1% average year advances of 0.8% in 2014 and 0.9% in 2015 recorded before. Some economists blame inaccurate measurement. It’s very hard to capture qualitative changes in improved goods and services. But it’s also true that there can be other plausible explanations. It’s easier to expand the productivity of manufacturing than of service-producing industries, but the latter represents an increasing share of the U.S. economy.  When infrastructure of all sorts is neglected, it’s inevitable that productivity will suffer, too. Technological progress this century has been focused on mobile devices. Unlike the previous innovation in data processing, the current focus is geared to leisure activities but doesn’t provide a big bang in enabling the same output to be produced in fewer man-hours. Investment itself has slackened, as the past decade has offered numerous uncertainties to persuade businesses to delay plans, sit on cash, and not leap into the unknown.

Inflation is not a problem, but the experience of the 1970s and 1980s when it was high and accelerating still colors political thinking and the execution of policy. Wage growth has picked up, which is a good thing, but it’s not growing at a dangerous pace. Core PPI inflation is 0.4%. The PCE price deflator is only 0.9% higher than a year ago, and its core element is at 1.6% and below the Fed’s target.

It’s understandable to see why the Federal Reserve hesitates. The low level of global sovereign debt yields doesn’t merely reflect a bet on continuing very low central bank rates. There’s also a bet that global demand will stay soft. And nobody knows if the political will and ability to use fiscal stimulus will emerge in the United States or elsewhere. Finally, in the absence of above-target inflation, it’s very hard to find any precedent when a central bank tightened while also faced with as sluggish GDP growth as the U.S. has experienced these past three quarters.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

 

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