On Friday we learned that the U.S. economy surprised on the upside by adding 280,000 new jobs in May, and that 32,000 more jobs had been created in March and April than originally reported. The fact that economic growth is still sluggish, while more and more workers are finding jobs, suggests that productivity — output per man-hour — is slowing. That fact detracts a bit from the good news, since in the long-run wages can’t rise without causing inflation if productivity does not increase.
Although the labor market is improving, American consumers have suddenly and unexpectedly fallen in love with thrift. In the first quarter, personal consumption expenditures were at the lowest level in five years. In the last six months the personal savings rate jumped a full percentage point, from 4.6 percent to 5.6 percent. This is good news, unless it isn’t. We have had enough of over-indebted consumers causing a financial upheaval, but economic growth would certainly take a jump if consumers would spend more of the cash they save when they fill their tanks with low-priced gas.
Which brings us to facts that seems to belie consumer parsimony:
· Leisure and hospitality industries are leading the job-growth parade, even though consumers are saving more and spending less, and the strong dollar is scaring foreign tourists away.
· Car sales are booming, with metal moving off showroom floors in May at the fastest annual pace since 2001, thanks in part to Janet Yellen, the chairwoman of the Federal Reserve Board. The low interest rates that are the signature feature of her reign make it easy for consumers to borrow money to finance their taste for big vehicles, loaded with “extras”. The market is so hot that Ford, unable to keep up with demand, cut its traditional two-week shutdown of many of its plants to a single week, reducing its workers’ vacations to nine weeks below those of many of their French counterparts.
· The housing market is moving from tepid to hot. Compared with last year, permits to build new houses in April were up 6.4 percent, housing starts (new construction) 9.2 percent, new home sales 26 percent, prices on new homes 8.1 percent, and existing home sales 6.1 percent. Real estate agents are complaining of a lack of inventory of unsold houses.
Looking at all of these indicators — rising job creation, a booming car market, a recovering housing market — economists at the Organisation for Economic Co-Operation and Development (OECD) have decided to cut, rather than increase, their 2015 growth forecast. These experts had guessed that the US would grow at an annual rate of 3.1 percent, but now put that figure at 2 percent, a 33 percent reduction in a forecast only seven months old.
Let’s try to sort through all of these facts. The first and most important conclusion is that there is so much uncertainty as to the future direction and pace of the U.S. economy that we can expect more volatility in share prices and other indicators as investors’ moods swing from gloom to joy, and back again as new data come in. The second is that it will be almost impossible for the Fed to raise interest rates this month: Yellen & Co. will want to be more certain that the economy is in take-off mode. Indeed, it has become less likely that a September increase is in the cards.
The third is that the keys to the future strength of the economy are to be found in America’s boardrooms and in the jobs market. Although our titans of industry are cheerier than they have been in a long time, they are directing that optimism and energy to deal-making rather than building new facilities that might increase worker productivity and accelerate the increase in wages. In May, Yellen’s cheap credit allowed corporations to borrow at about 3 percent, half the rate prevailing before the financial bust. That fuelled a deal-making boom that has topped the dotcom bubble, making for lots of popping of champagne corks in investment banks and law firms, but less investment in expansion of production facilities.
The other place to look for clues to future growth is the labor market, and not only to jobs growth, which has recovered from its winter swoon. The course of wages will be a key. And not only the level, which now seems to be rising at a satisfactory annual rate of around 3 percent. We know that Walmart, MacDonald’s and other employers of low-wage staff are in the process of raising wages in response to tighter markets for those sorts of workers, and that increases in the minimum wage in many states are adding to upward pressure at that end of the labour market.
But we also know from a Wall Street Journal survey of 33 cities in which the jobs market has returned to pre-recession levels, that in 22 wage growth is trailing pre-recession levels. Moreover, as Yellen keeps reminding us, sitting on the side-lines, too discouraged to continue looking for work or working part time while hoping for more hours and more permanent positions, is a large “reserve army of the unemployed”, to borrow from an economist still in fashion in many academic circles. Unless those workers have permanently elected the couch over the workplace, their re-entry into the job market should dampen wage increases even as new jobs are created. At least for a while. Meanwhile, median household income – the spending power of those right in the middle of the income distribution – remains stuck at 1988 levels when inflation is taken into account.
A final piece of the puzzle, dug out of the data by The Lindsey Group consultancy. Some 90 percent of all the growth in weekly earnings in the first quarter of this year went to workers over 55 years old. These men and women are richer than younger workers, and therefore more likely to save than spend their increased incomes, especially since low interest rates have reduced the income from their savings and they feel a need to boost their retirement nest eggs.
“In my head are many facts of which I wish I was more certain … Everybody find confusion in conclusion he concluded long ago”, moaned the King of Siam in the musical, The King and I. Like the King, an economist these days should admit “I am not sure of what I absolutely know”. But with that qualification permit me to venture two guesses: The U.S. economy is stronger than the aggregate GDP figures suggest, and consumers will part with their new savings in time to make it a merry Christmas for retailers.
But that doesn’t mean it is OK not to worry. For one thing, we are at or close to full employment, if the 3.3 percent annual rate of increase in hourly earnings is any indication. Should growth accelerate, the labor market will tighten further and “prospects for wage inflation” will increase. Throw in dollar stabilization and rising oil prices, and inflation cannot be far behind, reckons Larry Lindsey’s team.
Then there is the Fed. It has added $4 trillion to its balance sheet, and has to start selling off some of those bonds, which will drain cash from the economy. So if you don’t want to worry about inflation, worry about another recession.
Inflation? Recession? As the King sang, “It’s a puzzlement.”
Have a nice weekend.
