Many commentators seem to be pessimistically focused on the U.S. economy’s weak wage growth and manufacturing sector trouble. They don’t appear to be paying attention to the signs that the U.S. economy has actually been operating at a very high level in recent years, including one statistic that shows the economy’s true strength.
This statistic, which may surprise you: In aggregate, the hiring of 8.1 million people over the past three years is equal to all the U.S. job creation accomplished in the 14 years prior, according to a BlackRock analysis of jobs data following the March employment situation report. See the chart below.
In recent years, the U.S. economy has operated at much better levels than many market watchers gave it credit for. It has displayed quite remarkable labor market strength considering the secular headwinds to growth, such as an aging demographic, and it has been growing much faster than traditional metrics depict. This is because, as I’ve noted before, new technologies provide services at a much lower cost, and deliver efficiencies and productivity enhancements that are not captured in traditional economic data.
Now for the bad news: Labor market growth will probably slow in the quarters ahead as the economic cycle crests, though I don’t believe the U.S. economy will enter a recession. Changes to headline payrolls tend to lag corporate profit changes by a six-month time frame, according to BlackRock research. Employment today may still be flattered by previously growing corporate earnings. So we’re likely witnessing the highs in employment growth, as companies scale back expenditures and a slowing corporate profit growth rate feeds through to a worsening jobs picture by the back half of 2016.
Finally, intertwined trade and global growth challenges are another headwind to the heretofore buoyant U.S. economic and hiring experience. For now, the Federal Reserve (Fed) is doing exactly what it should be doing in today’s economic environment, after having missed the optimal window to raise rates two years ago. The central bank has made it clear it’s willing to let labor market hiring and wage growth run a bit hot, given that it has a multitude of tools to deal with that scenario but fewer options for reversing any global growth or inflation contagion.
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Global Fixed Income and is a regular contributor to The Blog.