Amid geopolitical tensions in Eastern Europe and the Middle East, and with the Eurozone on the verge of deflation, the U.S. comes across as an oasis of stability. And this past week's data certainly reinforced this view. First, we had GDP figures pointing to 4 pct growth in the 2nd quarter, a full point above consensus estimates. What's more, the growth was broad-based, with contributions from consumption, business investment, and even state/local government spending. And to top it all off, July posted yet another month of >200K job gains. Without a doubt, the U.S. economy has left the winter blues behind.
But is the U.S. economy strong enough to stand on
its own feet? Can it now do away with the crutches of ultra-loose Fed
policy? To put it bluntly: absolutely NOT!
The
first consideration is wage growth. And to say the least, it continues
to be disappointing. As the chart below shows, wage growth has more or
less stagnated around the 2 pct YoY mark. Considering that inflation in
the post-crisis era has averaged around 2 pct as well, this essentially
means that in real terms, American employees' purchasing power has barely improved. Considering
that consumer spending accounts for 70 percent of U.S. GDP, faster wage
growth would be indispensable if the U.S. economy had any chance of
achieving "escape velocity." This is not something we've seen.
Source: Federal Reserve Bank of St. Louis
What could lift wages going forward? The key is productivity growth - after
all, firms would only feel justified in paying higher wages if their
employees each produced more. On this score, recent developments are
also hardly encouraging. After a brief surge following the 2008-2009
recession, productivity growth has been stuck at rock bottom since 2011.
And with U.S. companies preferring to deploy their windfall profits
toward stockpiling cash and buying back shares (rather than toward
productivity-enhancing investments), this scenario is unlikely to change for the better anytime soon.
Source: Federal Reserve Bank of St. Louis
The
third major obstacle to a full-fledged U.S. recovery can be summarized
in the below chart, courtesy of Reuters. The good news is that the
number of officially unemployed has almost fallen back to pre-recession
levels (the bluish-green line). But at the same time, the number of
people not in the labor force (the orange line) has gone in just one
direction - up. In other words, there has been a steady stream of individuals leaving the U.S. labor force. This
has been mostly driven by demographic changes, specifically baby
boomers retiring, though there has been a meaningful contribution from
discouraged workers as well. Regardless of the cause, the fact is that
the slice of the U.S. population neither working nor looking for a job
has risen. This raises the bar even further for how much the U.S.
economy would need to grow before policymakers can declare victory.
Source: Reuters
So for all the media hype surrounding the headline numbers, it's important to keep the (equally-important but less cited) underlying numbers in mind: wage growth, productivity, labor-force participation rate. Until these measures show meaningful improvement, the Fed will be in no rush to tighten the screws on easy money.
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