Many market observers lately have been making some pretty pessimistic evaluations of the U.S. economy, declaring that it’s stagnating and soft. Given this pessimism, which began following weak early 2015 data, it’s hardly surprising that most market watchers interpreted last week’s June’s job report as another sign of the U.S. economy’s softness.
In my opinion, however, the pessimism is unwarranted and dramatically off-base, creating a distorted picture of the U.S. economy. Indeed, when you look beyond the headline economic data and aggregate nominal numbers the pessimists tend to focus on, you see a solid, and improving, U.S. economic recovery.
Take the June jobs report. While the headline payroll gain came in weaker than expected, the strong U.S. labor market is evident when you look at payroll numbers over the longer term, including the 3-month, 6-month and 12-month moving average payroll gains. Last month, they came in at 221,000, 208,000 and 245,000, respectively, all stronger than the 200,000 average level of jobs growth that has been typical of past periods of economic expansion.
In addition, the 5.6 million jobs created in the past 24 months is greater than the combined total created in the 13 years prior. Meanwhile, other employment reports, including jobs-hard-to-fill/jobs-easy-to-find measures and unemployment claims, remain strong.
To be sure, stronger average earnings growth is still a missing component of the U.S. labor market recovery. However, one of the primary reasons for June’s stagnant hourly earnings is the composition of jobs being created. The new jobs appear to be in sectors that are lower paying, keeping the average levels lower than might otherwise be the case. Looking forward, I expect to see stronger wage gains in the near future, given the wage improvement that has been displayed by other indicators in recent quarters, such as the Employment Cost Index (ECI). I’ll be closely watching the ECI at month’s end to get another view on the wage picture.
Elsewhere, as I wrote last month, U.S. consumption is likely stronger than headline figures suggest, when you consider that much recent weakness is a result of falling oil prices and the dynamic of new technologies’ downward influence on price.
Similarly, corporate investment is probably stronger than it appears, due to the same deflationary forces at play within the information technology (IT) segment of the capital investment universe. Indeed, on a constant-dollar basis, IT investment has surged far beyond what’s implied by merely looking at gross corporate spending levels, which don’t take into account tech price deflation. Finally, “easy to count” metrics about the economy also show improvement. For instance, this last April, the U.S. saw higher levels of income tax revenue than ever before, and auto sales and hotel revenues have been accelerating recently.
In short, a close look at much recent economic data shows a U.S. economy that is doing quite well considering the long-term headwinds holding down growth, from demographic changes to consumer debt levels. And while U.S. economic growth today is lower than at points in the 1980s and 1990s, it’s still quite remarkable in a global environment beset by only moderate European growth and slowing growth in China and other emerging markets.
As for what this means for the timing of a Federal Reserve (Fed) rate hike, data about the U.S. economy on balance exceed the reasonable measures a “data dependent” Fed might require to move off of “emergency interest rate” levels, as BlackRock’s proprietary “Yellen Index” of labor market/economic conditions shows in the chart below.
That said, we may not see a rate rise from the Fed in September, given muted wage growth and risks to U.S. growth out of Europe and China. The Fed is likely to hold off until later this year, especially if we see greater than anticipated stress on the U.S. economy from Chinese growth acceleration, and or if the situation in Greece drags down European growth, leading to more European Central Bank (ECB) stimulus and a strengthening dollar.
Source: BlackRock research
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