I yield to few when it comes to pointing out persistent weaknesses in the U.S. economy, particularly as pertains to the distribution of growth, which, as I’ll discuss, remains a real problem. But that said, and especially compared to many other advanced economies, and considering all the lousy policy we’ve thrown at our economy, from the perspective of overall growth we’re doing pretty darn well.
I’ll provide some details in a moment, but what’s important now is that we keep this going. Given the millions of globally moving parts, there’s of course a lot that can go wrong, and we are not at all so independent from those other slowing economies that we can ignore their woes (about 13 percent of our exports go to the euro zone). But there are two institutions that can make a big difference to the sustainability of the recent improvements: the Fed and the Congress. And yes, that latter group is a bit more worrisome.
On the improving indicators, let’s start with Friday’s jobs report. It came in well above expectations, as employers added 321,000 jobs on net to their payrolls (every month they add a bunch and cut a bunch — this net number is the difference). Of course, the monthly numbers are volatile, so I like to smooth them out by looking at the average monthly gains over the past three, six, and 12 months.
As shown in JB’s official, accept-no-substitutes jobs day smoother, shown above, there’s a nice acceleration underway, with payrolls up 278,000 per month over the past three months. Over the past year, the average is 50,000 jobs per month lower.
Unemployment didn’t change last month, but at 5.8 percent it’s down from 7 percent a year ago, and for the right reasons: more people getting jobs, not more people giving up and leaving the labor market (and thus not being counted as unemployed).
Turning to real GDP growth, I pointed out here, we’re running north of 3 percent; the euro zone is running south of 1 percent. Unemployment there is 11.5 percent.
Now, pride goeth before a downturn — I’ve noted that an accurate predictor of a coming recession is some economist announcing that we’ve conquered the business cycle. But I raise these differences between us and Europe for a few reasons.
First, they are largely policy driven (see link above). We’ve been guilty of austere fiscal policy, which in fact significantly lowered growth rates last year. But Europe continues to suffer from a far worse case of premature contraculation. At this point, Congress is actually in “do-no-harm” mode when it comes to fiscal policy, i.e., the growth impulse from fiscal policy, a big negative in 2013, is neutral this year.
But will it remain so? Can we count on the new Congress to not mess things up, economically speaking?
Not to freak you out or anything, but I count something like at least four or five of those artificial budget deadlines in our near future. The first cliff is in mere days. The federal budget ceases to fund the government by late next week. They’re working on another budget patch, and it looks promising, by which I only mean I don’t foresee a shutdown. And yes, that’s a low bar, especially given that it will set up the next cliff for September 2015, not that far away.
They just passed a tax extenders bill, but it runs only through the end of this year, i.e., businesses will have to play the same guessing games re: next year’s tax policy that they just finished playing this year.
The highway trust fund is expected to run out of funds by the spring of next year, and that’s a big enough deal to throw a wrench in production and jobs on infrastructure projects across the land. (If I may, a quick editorial comment: Given the sharp decline in gas prices, wouldn’t it be a neat time to raise the federal gas tax that’s been stuck at about 18 cents/gallon since 1993?!)
Of course, the big kahuna in this space is the debt ceiling, which will need to be raised again late next summer or early fall.
Now, it’s entirely possible that the Congress will meet all of these deadlines. After all, while there was a government shutdown last year, there have been numerous budget patches since then and the debt ceiling has been raised a few times, though it’s taken a fair bit of drama to get there.
But this new Congress arguably contains more members who don’t handily make the kinds of connections implied by my argument. What looks economically reckless to me may well look like a big plate of “freedom fries” to them. Plus, they’re already upset with the president for his recent immigration action, and I suspect — and hope — that he’s got more independent actions up his sleeve if gridlock remains in full force.
So stay tuned.
Before I go, a word about the Federal Reserve. Even with all the improvements noted above, there’s still considerable slack in the labor market. Since 2010, nominal wages (before accounting for inflation) have been growing an average of 2 percent, with a standard deviation of 0.2 percent (meaning that they’ve been basically steady at this growth level). Even last month, with the big payroll number, wages were still up just 2.1 percent over the year.
Until recently, when gas prices started falling, inflation was running at about 2 percent per year as well (it was last up 1.7 percent), implying stagnant earnings.
I have deep faith in Fed Chair Janet Yellen’s ability to assess the key points here: yes, our economy’s improving but considerable slack remains, there’s a lot of room for faster wage growth, and inflationary pressures are a phantom menace. In fact, I’d say this is probably the dominant view among the members of the Fed’s committee that votes on how to respond to these issues.
But I’m sure they’ll be getting a lot of pressure to preemptively raise rates from inflation hawks with sharp and indiscriminate talons. That would be a big mistake. Research I’m working on and will post here soon suggests that if things continue to percolate along at their current pace, wage growth might get to where it needs to be by the second half of 2018, and that’s for the average. For middle-class and lower-wage workers, it could take longer.
So here’s the plan: steady-as-she-goes at the Fed, and do-no-harm in the Congress. That doesn’t sound too hard, right? Right?? Anyone, anyone…Bueller??