The US economy cannot escape the “generation gap” either!

Today we arrive at Easter and as we try to forget the leaders debate in the UK last night we find ourselves facing a day where the Bureau of Labor Statistics presents the US employment report for March. This brings me to a long running theme of this website which is that on the surface the US economy looks good but as one digs deeper problems emerge. This has been reinforced by the recent trend to a combination of poor and disappointing economic data which has been greeted in many areas with surprise even when it is not one! On the other side of the coin we have an employment situation which looks very strong.

Total nonfarm payroll employment increased by 295,000 in February, and the unemployment rate edged down to 5.5 percent, the U.S. Bureau of Labor Statistics reported today.

The Generation War

However all is not as good as it may seem and in a repetition of the situation in the UK it is often newer usually younger entrants to the labour market who have been affected. Let us switch to earnings where there have been less promising numbers. Federal Reserve Governor Lael Brainard addressed this subject only yesterday.

inflation-adjusted full-time weekly earnings among 19- to 24-year-olds with only a high school diploma fell about 5 percent between 2008 and 2012.

Also if we look beyond headline unemployment into the world of underemployment then the clouds darken here too.

In 2012, roughly 45 percent of college graduates between the ages of 22 and 27 were underemployed, up by one-third relative to 2001 and the highest underemployment rate since the early 1990s.

She was also concerned about the longer lasting effects of the impact of the Great Recession.

the employment rate of those graduating from college during the Great Recession may recover relatively soon, but their earnings may be reduced for up to a decade or longer as this cohort initially secures lower-quality jobs and then only gradually works its way back up to the normal earnings trajectory.

So it is not a good time to be a college graduate in the United States and as we wonder what is now normal this may persist.

Student Debt

An interesting segway which repeats themes established on this website if the way that Governor Brainard links weaker employment and earnings opportunities with the rise of student debt.

As with any investment, however, the returns on educational investments are not uniform, and some investments do not pay off. The risk of a low return is accentuated when the investment is financed through debt and based on the assumption that the educational investment will translate into higher wages that make the debt payments affordable.

This is a good point as higher debt clashes with weaker earnings trends for obvious reasons and poses a different type of affordability question to looking at currently low interest-rates. Indeed something else happened as college schooling got more expensive too just as it became less valuable!

Since the outset of the recession, the annual published tuition at four-year public colleges increased 24 percent, after adjusting for inflation, during a period when real median incomes declined 8 percent.

Could that be a clearer example of inflation? Odd how we get so many is it not in a world where supposedly there is no inflation?! Actually there were arguments in the UK that it should not be in consumer inflation presumably on the ground that by going up it was misleading!In fact it is part of continuing services inflation as we see the price of goods fall. Just for the avoidance of doubt it is in the US CPI with a weight of 1.49%.

Also inflation measures usually adjust for quality well in a upwards direction anyway. But implicit in Governor Brainard’s discussion is a downwards quality adjustment which she then makes explicit.

Despite the apparent lower likely average return to education at for-profit schools, attendance at these schools has increased faster since the financial crisis than at other institutions…..This rapid growth, and the fact that for-profit colleges disproportionately attract first-generation college students as well as students relying on debt to fund their education, bears careful scrutiny.

The Housing Market

The above has led to this.

Moreover, the fraction of young adults who own homes also fell substantially: After peaking at 22 percent in 2005, the overall rate of homeownership among young people fell to 16 percent in 2014.

Although she does not put it quite like this we find ourselves mulling the fact that the US Federal Reserve is seeing something of a policy backfire here. It could hardly have done more to help the US housing market with its near zero interest-rates and expanded its balance sheet to US $4.4 trillion including some US $1.73 trillion of mortgage-backed securities. Yet the view of young people is apparently this.

Moreover, there is some evidence that today’s young people have a skeptical view of the wisdom of buying a home as a result of the housing crisis.

This is rather reminiscent of the Bank of England and its policy impact on savings in the UK. In fact central bankers are seeing ever more of these types of policy backwashes. This has an impact on the modern holy grail of central banking which is what it/they define as wealth and the rest of us call asset prices.

Nonetheless, if the decline in homeownership among young people proves persistent, the implications for asset building for the future could be of concern, since homeownership remains an important avenue for accumulating wealth, particularly for those with limited means.

How dare young people not do as they are told!

Economic growth may continue to disappoint

An interesting point bringing a few themes together was made by Bill McBride of Calculated Risk who did some research after spotting this in the Wall Street Journal.

The fourth quarter report means that growth for all of 2014 clocked in at 2.4%, which is the best since 2.5% in 2010. It also means another year, an astonishing ninth in a row, in which the economy did not grow by 3%.

He then looked at US demographics and noted that if you look a labour market trends you should not be surprised by that and his conclusion was.

Right now, due to demographics, 2% GDP growth is the new 4%.

Recent Data disappoints

Trade Data

You can take this two ways. The glass half-full version is that at reduction in the February trade deficit to US $35.4 billion will boost US GDP for the first quarter of 2015. The glass half-empty view is to wonder why imports fell by over 4% after falling by 3% in January, after all a higher US Dollar makes them cheaper. So we return to wondering about the strength of demand which is reinforced by the fact we have seen Iron Ore prices fall to new credit crunch era lows below US $50 per tonne.

Retail Sales

The glass half-full version is that retail sales continue to grow. From the Census Bureau.

Total sales for the December 2014 through February 2015 period were up 2.9 percent (±0.7%) from the same period a year ago.

The not so positive nuance is that month on month the numbers have been falling such that February alone was only 1.7% higher than a year ago. Whilst single month figures in this area are unreliable we do seem to be seeing a dipping trend. The adjusted number peaked at US $447.1 billion in November and was US $437 billion in February.

Just to be clear the numbers above do not adjust for inflation so we should perhaps be grateful it is near zero,officially anyway. Oh and take your pick about this from the Ford motor company this week.

Ford’s March retail sales were up 1 percent, fleet sales were down 13 percent, and overall sales were 235,929 vehicles, down 3 percent.

Durable Goods

This is following a similar pattern to the retail sales situation where we have year on year growth of 3% but the recent situation is not so positive.

New orders for manufactured durable goods in February decreased $3.2 billion or 1.4 percent to $231.3 billion, the U.S. Census Bureau announced today. This decrease, down three of the last four months, followed a 2.0 percent January increase.

New orders in 2015 have only been 0.5% higher than last year.


There is much to consider in the state of play of the US economy. The forward momentum the official statistics gave it faded at the end of 2014 and this new uncertainty seems to have persisted into 2015.We wait to see how the oil price fall impacts as we wonder if the negatives (shale production) is impacting earlier than the positives. Not everybody has adjusted as the San Francisco Federal Reserve spectacularly demonstrated less than a month ago.

We expect a similar dynamic in the first quarter of 2015, with GDP growth being pushed up by strong consumer spending but pushed down by declining net exports.

So much for reality being a friend of theirs. But if we look deeper into the data we see that there are trends at play we see elsewhere. The leaders debate in the UK took a question on prospects for younger people last night probably about the same time that Governor Brainard was speaking. That is not really a coincidence!

If you want the blue pill then blame the weather which is a convenient fall-guy/girl. for the rest of us there is the issue of how it can always be the weathers fault. Oh and the economists in San Francisco discovered something that everybody else has now perhaps since economies began. The emphasis is mine.

Many people find jobs without ever reporting actively looking for one. This implies that, rather than them finding jobs, the jobs actually find them. Analysis of data on workers’ search behavior suggests that this is the case for a majority of the people who get hired.

I will leave readers to decide whether that means there is hope for central bankers or demonstrates that there isn’t any!

Happy Easter to you all.




18 thoughts on “The US economy cannot escape the “generation gap” either!

  1. Hi Shaun

    I think that the US economy is in a similar position to ours: much more fragile than the official statistics imply.

    What the central bankers have done now for around twenty years is to reduce interest rates. Now some of this reduction has followed inflation but some has not and we seem to have neutered one of the functions of interest rates, which is to assist in the allocation of consumption and output between time periods. It seems to me that we have a policy of, in effect, bringing consumption forward, not only through lower rates but also through shenanigans such as sub prime etc. Well, if we do this the implication is that we need lower and lower rates and more shenanigans and more debt to keep the show on the road and this must have a limit. What happens when we reach that limit?

    Also keeping the show on the road is to my mind getting more and more difficult. We have powerful demographic trends in large parts of the world which will mean lower consumption. It isn’t only the UK and the US which have aging populations; most of Europe is in a “worse” position as is Japan and even China which, as some commentators have said, will get old before it gets rich. There’s an interesting video on this on the Moneyweek site.

    • Hi Bob J

      I agree completely on the continuing pressure for lower interest-rates. I started to fear negative interest-rates in late 2010 if I recall correctly and now of course we see them in and around the Euro area. Bank of England Governor Mark Carney was foolish in my view when he called 0.5% Base Rates in the UK the “lower bound” partly because he has contradicted himself since and partly because it was wrong then as the ECB was at -0.2%.

      If we look at it the other way we are told that the US and UK economies are strong but nobody has raised interest-rates. A dip will eventually come and I believe that talk will then be replaced by action.

  2. Hi Shaun, it’s nice to see the US reporting on underemployment, the UK doesn’t seem to bother or does it? If so please post the link if you know it as I’d like to have a look.Why does everyone keep referring to this depression as a Great Recession – it’s a depression greater than the 1930’s the impact of which has been hidden in Government debt.

    On the US housing market, my brother is a land lord over there and it seems rents are significantly cheaper over there relative to the UK so that could be another factor in thinking of staying in rented accommodation.

    Regards current stuttering, I would suggest US narrow money was falling last Autumn but started an upwards trend about December and sems top be continuing – pointing to a improving second half of 2015.

  3. There probably should be something in the measure(s) for inflation which show the rise in the cost of going to university/college as well as for the cost of house purchase. Funny that these 2 are omitted from all the stats everywhere when in reality they account for a large proportion of the inflation in most ordinary peoples’ lives here and in the US.

    • Hi Jan

      My issue with college fees is whether they are counted correctly as a shoot upwards as happened in the UK for example is under my understanding at the previous years (lower) weights so not fully allowed for. Also of course they hit some groups completely disproportionately.

      It would be interesting to read what Andrew Baldwin thinks of this…?

  4. Hi Shaun,

    Happy Easter.

    “inflation-adjusted full-time weekly earnings among 19- to 24-year-olds with only a high school diploma fell about 5 percent between 2008 and 2012.”

    This has been a trend since the launch of the IBM PC, where unskilled and semi-skilled earnings are being steadily squeezed. In fact all the way up to post-graduate jobs at best in real terms the average are only just about holding their own according to US statistics. I can’t see this trend changing and it may accelerate as there is much more automation in the pipeline. Growing sectors are likely to be poorly paid one-on-one jobs like elderly care.

    I don’t believe any generation has had it easy when it comes to getting on the property ladder. In the 1970’s and early 1980’s to get a mortgage people had to save at a building society, join a queue and then be assessed before getting a mortgage and then had to contend with very high interest 12-13% rates! After WWII the majority lived in rented accommodation with this creeping up to a peak of 60-odd percent during the Thatcher years.

    Young people need to think much more about their careers in terms of in-demand skills and potential earnings as this will dictate how wealthy they are as adults throughout their careers. There are areas where there are massive skill shortages in the US and UK, where earnings and employee benefits are steadily increasing.

    • Hi Rods and Happy Easter to you too

      I think that each generation thinks that they have it tough, I know that mine did! However we did not know the half of it! The “rising tide lifts all boats” theory for real wages broke down some time ago and the credit crunch has made it worse. So as you say it is rough seas ahead for the likely losers who will mostly, and sadly, be at the lower parts of the spectrum.

  5. Note the massive contradictions in the US administration, where individuals generally get taxed on whole world income – where the middle class get walloped with 40% + taxes, yet the mega wealthy get lavish deductions and low effective tax rates. Corporations get away with tax exempt offshore profits, but not ordinary individuals.

    It comes from a disfunctional political system where the rules are dictated by lobbyists. You can see the rot in the vitriolic and rabid anti-Obamacare movement, which might just lose the election for the GOP.

    But rather than just whine, I’m going to suggest the pie in the sky solution of using referendums and/or crowd sourcing to reduce the lobbyist power whilst improving democracy.

    • Hi ExpatInBG

      There are problems with democracy everywhere right now aren’t there? Before this is over I do not think that your proposed solutions will be considered to be pie in the sky. Look at the UK where we are seeing more and more anti-establishment parties.

      As to the US taxation system it is also anti-competitive as I remember many cases in my city career of warnings about doing US business. Yet we here little about such anti-competitive practice in the media.

      • There’s certainly a problem with democracy when the Prime Minister and leader of the Conservative Party, (Dave) is related to the Shadow Deputy Prime Minister and Deputy Leader of the Labour Party (Harriet [Paedophile Information Exchange] Harman).
        It’s no wonder the Govt. is dragging its feet on that Inquiry either.

    • Actually, I have had a thought: does the fact that students are, by paying their fees, buying a service and adding to GDP? Yes, or Not yet?

      • Hi therrawbuzzin

        The answer is yes as I would suspect it is being raised by too much as the deflator would be behind the times if you get an initial surge in the way that we did in the UK. Conceptually you could argue about it rising at all due to the tuition fee change as of course reality is unchanged and maybe worse if student numbers fall in response.

        • So debts which, by the Govt’s. own admission 75% of will be written off, are being used to stuff GDP even further!

          So next time the Govt. is stuck for a rise in GDP, it just doubles student tuition fees and admits it will write off 90%.

          You have to admire the inventiveness of these liars. (That’ll be why we count research and development twice.)

        • Don’t be disconsolate, Shaun, it is not just your field where figures are debased.
          Remember five-a-day, where the idea was to get people to eat more fresh fruit and veg?
          Well, because the tomato sauce contains lycopene, it is now the case that a tin of beef ravioli in tomato sauce, counts as one of these five portions

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