It has been a while since we have taken a good look at the US economy so it is overdue. This morning it has been analysed by the International Monetary Fund which has grabbed some headlines with this.
U.S. growth projections are lower than in April, primarily reflecting the assumption that fiscal policy will be less expansionary going forward than previously anticipated.
As you can see the IMF has had something of a road to Damascus change since the days it argued that Greece could expand its economy in the face of harsh austerity! Also it is hard not to have a wry smile at the thought that anyone can really predict accurately what will emerge from the Trump administration next. Of course it and the IMF are on various collision courses included this one which was mentioned in the IMF’s Friday press conference.
Since the Trump administration has been promoting its “America first” polices, Managing Director Lagarde has talked more about promoting free and fair trade policies
Returning to the forecast here are the specific numbers.
The growth forecast in the United States has been revised down from 2.3 percent to 2.1 percent in 2017 and from 2.5 percent to 2.1 percent in 2018.
In addition to the view on fiscal policy there were concerns about this.
the markdown in the 2017 forecast reflects in part the weak growth outturn in the first quarter of the year.
That is slightly odd because as regular readers will be aware US economic growth tends to underperform in the first quarter these days. Also it is reassuring to know that the number could be either too high or too low.
Risks to the U.S. forecast are two sided: the implementation of a fiscal stimulus (such as revenue-reducing tax reform) could drive U.S. demand and output growth above the baseline forecast, while implementation of the expenditure-based consolidation proposed in the Administration’s budget would drive them lower.
So let us move on with two thoughts. The first is that if we look at the IMF’s track record it is completely incapable of forecasting economic growth to that level of accuracy. Secondly I note that the forecast for the next two years is the average of the last two.
The Nowcast
Several of the US Federal Reserves do what are called nowcasts of economic forecasts so let us head down to the good old boys and girls in Atlanta.
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 2.5 percent on July 19, up from 2.4 percent on July 14. The forecast of second-quarter real residential investment growth increased from -1.6 percent to -0.6 percent after this morning’s new residential construction report from the U.S. Census Bureau.
This represents an overall decline on the initial estimate of 4.3% in early May. There have been notable falls in both export expectations and investment of all types including housing combined with a dip in consumption. Perhaps the fall in exports is a response to the stronger dollar that we saw a year or so ago.
The Labour Market
This remains very strong as the latest report indicates.
Total nonfarm payroll employment increased by 222,000 in June, and the unemployment rate was little changed at 4.4 percent, the U.S. Bureau of Labor Statistics reported today. Since January, the unemployment rate and the number of unemployed are down by 0.4 percentage point and 658,000, respectively.
As you can see in spite of the fact that we are in fact above what some would call full employment jobs are still being generated. If we move to the measure of underemployment there continue to be improvements in it as well. The U-6 measure of this has seen the rate fall from 9.6% in June 2016 to 8.6% in June ( seasonally adjusted) this although a rise in this June needs to be watched.
However as we observe so often to the sound of Ivory Towers crumbling to the ground this has not generated much wage growth.
In June, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $26.25. Over the year, average hourly earnings have risen by 63 cents, or 2.5 percent.
If we move to median wage growth to exclude the impact of very high earners then we see something that is becoming ever more familiar across many different countries.
We see that the good news is that the US has some real wage growth but the bad news is that it is not that great. The numbers if we return to averages are below.
Real average hourly earnings for all private nonfarm employees increased 0.8 percent from June 2016 to June 2017. The increase in real average hourly earnings combined with a 0.3-percent increase in the average workweek resulted in a 1.1-percent increase in real average weekly earnings over the year.
Not much is it? If we look back on the chart above we see higher levels that it looked briefly we might regain but in spite of further employment improvements we are now left mulling wage growth fading and wondering how much it and inflation will dip. At this point it is hard not to wonder also about the impact of the “lost workers” from the around 4% fall in the labour force participation rate.
Monetary policy
This is of course being “normalised” which at a time when nobody really has any idea of what normal is anymore is therefore easy to claim. An interest rate of between 1% and 1.25% certainly does not feel normal nor does a central bank balance sheet approaching US $4.5 trillion. There are now plans to trim a minor amount off the balance sheet.
Of course this leaves everyone wondering what happened when the next recession strikes? Well everyone apart from those who believe that the central bankers have ended recessions. It looks as though bond markets have switched to wondering about that as the 30 year which had pushed above 3% is now at 2.8%. Also even the IMF has spotted that the US Dollar is in a weaker phase now.
As of end-June, the U.S. dollar has depreciated by around 3½ percent in real effective terms since March.
These moves will take a little off the edge of what tightening we have seen as I note that US consumer credit flows are in the middle of the post credit crunch range,
In May, consumer credit increased at a seasonally adjusted annual rate of 5-3/4 percent. Revolving credit increased at an annual rate of 8-3/4 percent, while nonrevolving credit increased at an annual rate of 4-3/4 percent.
Comment
A couple of years or so we discussed the likelihood that US economic growth would be around 2% going forwards and we now note that such thoughts have come true. Is that as good as it gets? The US has had one of the better recoveries from the impact of the credit crunch in terms of GDP and unemployment. We should be grateful for that. But we are again left wondering what happens should things slow or head towards a recession?
Still some will not be too bothered, from the Financial Times
Jamie Dimon and Lloyd Blankfein each enjoyed $150m-plus rises in the value of their stock and options.
Does the continuing enormous gains of the banksters go into the wages numbers?
Notayesmanseconomics's Blog 
The problem with most of the supposed recoveries in the Western world, is that they’re based on increasing national debts running alongside diminishing marginal returns in terms of GDP growth versus debt growth.Each extra dollar of GDP is being paid for with the next generations economic inheritance.
You can split hairs in places like the UK and argue that the deficits aren’t what they were three years ago but if I remember correctly Georgey boy promised a surplus in 2017………………we’re nowhere near it.
The USA is in a similar predicament.For all that recovery,the participation rate is at 30 year lows
https://fred.stlouisfed.org/series/CIVPART
Agreed. participation rate is low. Perhaps non participants should be extradited to …. Syria… ! Heres another insight, this time about USA labor. There are 255 million citizens of working age, 102 million do not go to work. BLS reports 0.7Million unemployed. Go figure? http://www.alhambrapartners.com/2017/07/17/qualifying-shortage-labor/
An informative link Dutch – thank you.
When I looked at the chart it looked to me like the participation rate is in fact at 40 years lows (somewhere around the late 70’s) but an alternative view is that the participation rate is above the rate prior to the late 70’s and significantly above what it was in the 50’s and 60’s, although the recent trend since the early 2000’s looks ominous.
One thing to bear in mind is that when economists and politicians talk of recovery they are usually talking purely about GDP.
Regarding participation rate I should like to see the demographics of the US to establish if this may be related to previous birth booms or immigration flows before I would want to arrive at a conclusion as to how bad or otherwise this is.
Noo2,
The issue going back to the 50’s and 60’s is that many women were say at home Mums and also people were able to retire earlier.
Like you say for a valid comparison going back then you’d need some sort of demographic.
Hi Dutch, I’ve just read your reply to me. I don’t know if you’ll read this but anyway for anyone else who comes along, the participation rate relates to that proportion of the potential labour force whom are actively seeking work or are working. Stay at home Mum’s are therefore unlikely to qualify as part of the participation rate due to cultural differences in the US in the 50’s and 60’s (females were more widely expected to stay at home) consequently they were not seeking employment due to a culture of staying at home and therefore could not be counted as part of the participation rate, not because of lack of employment opportunities although it wasn’t that great as unemployment varied from circa 3% to 7.4% over the 50’s and 60’s but you have to consider American culture at that time too.
As for early retirement, there are two aspects:
Firstly, as participation rate is a measure of those in work or looking for work then it follows that someone whom has taken retirement is no longer seeking work so will not be counted within the participation rate.
Secondly and this relates to your belief that people retired earlier in the 50’s and 60’s, the social security retirement age in the US was 65 and only began to increase from that age in 2014 on a graduated basis up to age 67 by the year 2027(although early reduced retirement benefits were available at 62). Currently, the official retirement age is 65 years and 10 months and will slowly rise to 67 for those born after 1959. Early reduced retirement benefits continue to be available from 62 although the percentage reduction will be greater than it was in the 50’s – 2000.
So neither stay at home Mum’s nor alleged earlier retirement ages in the 50’s and 60’s can explain the current participation rate which is much greater than that in the 50’s and 60’s.
Meant to add the U6 unemployment rate is
‘Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons ‘
https://fred.stlouisfed.org/series/U6RATE
Q1 2017 8.6%
Q1 2008 9.2%
https://fred.stlouisfed.org/series/GFDEBTN
Federal Debt: Total Public Debt
$9.4 trillion Q1 2008
$19.8 trillion Q! 2017
That’s a lot of debt for a 0.6% cut in U6!!!
Btw o/t but the St Louis Fed website is so much easier to use than the BoE/ONS
Hi Shaun, personally I tire of any forecasts that quote fractional percentages. Based on the obvious historical empirical evidence that theyare all wrong then moving them up or down 0.1% is frankly just navel gazing. Lets have whole numbers going forward, you can have a choice of 5 only for GNP forecasts, here they are: 0,1,2,3,4 .Now 4 is very unlikely and zero is the end of the world, only 3 digits for them to play with.
Heres another insight, this time about USA labor. There are 255 million citizens of working age, 102 million do not go to work. BLS reports 0.7Million unemployed. Go figure? http://www.alhambrapartners.com/2017/07/17/qualifying-shortage-labor/
Hi Paul C
You might think that getting the direction of travel wrong for the UK over the past 12 months and getting everything wrong in Greece for 7+ years would lead to a little humility! But no as you say things get forecast to frankly silly levels of accuracy.
As to the number of US unemployed I think you need to shuffle your decimal point a little.
“In June, the unemployment rate, at 4.4 percent, and the number of unemployed persons, at 7.0 million, were little changed.”
Shaun, thanks for the correction. 7 Million is alot more but still shy of the 95 million who are not working but of eligible age and not counted as un-employed. I little more research on my part is due. Apologies. 🙂
I think economies like the US and the UK can continue along their current path for a while with the headline economic indicators and stock market indices looking pretty good. The problem is that fewer and fewer voters experience much benefit from all this — particularly the young. A great many of us are looking for the chink in the armour that will trigger another financial crisis be it student debt, car loans, housing bubbles, credit cards, or whatever else, but the truth is the central banks and governments will smother any such problem with liquidity and can push the day of reckoning out for decades if they want to.
The next crisis will not be financial, it will be political, and it will be caused by the fact that the current tools of economic expansion increase inequality (especially the inter-generational kind) to levels that are simply untenable in a democracy.
‘The problem is that fewer and fewer voters experience much benefit from all this — particularly the young. ‘
‘The next crisis will not be financial, it will be political,’
Couple of great points there Casey.
Hi Casey, I wouldn’t have believed you until I witnessed the Corbynista and Momentum movements and you may be right. That political change borne out of the younger folk growing older but still finding themselves “trampled” by an inequitable system and importantly starting to Vote!
I do however believe that economically we are at a quickening. Its more of a dual race with a leveraged outcome, both economic and demographic factors are coming together.
One example is Mark Carney, he will continue to devalue the pound because he will lower IRs and or do more QE, this is necessary to feed the debt monster. However further sterling devaluations will explode import inflation, think food and fuel. Those things will feed back into the peoples revolution.
We are at a tipping point in many ways. The media will blame it variously on… Trump, Brexit, hot summer and of course populism or IsIs.
:-O
I think you’re right Paul,declining real incomes are starting to bite. This is exacerbated at the that at the bottom end of the wage food chain by
1) the inflation baskets used by the ONS not reflecting what people on minimum wage actually buy
eg 10% rises car insurance.
2) average incomes covering over how many people are being moved either onto min wage or close to it
Re Carney/ONS and how easy it can be to manipulate nominal GDP higher/fiddle the inflation stats…. but for the man on the street,he can see what’s in his shopping basket and knows what it costs and what he/she has left as disposable income every month.
Anyone who refers to an economic recovery is a liar,deluded or incompetent.Dimon,Blankfein are to the modern world what Capone was to Chicago.
Earning obscene amounts of money for being in charge of organised crime.
That is what Banking has become they are serial criminal offenders.
When the debt bubble bursts the people will get fleeced again and the criminal elites will profit from it as they always do.
The US is bankrupt like the UK and others the debts can never be repaid.
I don’t think any Government/CB has ever had any intention of repaying all the public debt.
Maybe someone coming in and taxing to the hilt parasitic debt sellers like these 2 is the solution.
Shaun,
It appears that major US companies ( McDonald’s, Caterpillar etc) are quitting their home bases for the big cities apparently to recruit needed young IT workers but also leaving behind long-term employees with high oncosts ( pensions, health benefits etc).
Hi Chris
Interesting, so we are seeing yet more downwards pressure on wages as expensive workers are exchanged for cheaper ones. Not quite what a recovery is supposed to bring is it?
Great blog as always, Shaun. I don’t know whether it would be a good idea right now for the US Fed to raise the federal funds rate again or start decreasing its balance sheet in terms of broader economic considerations. However, if it does see itself as an inflation-targeting central bank with a 2% target inflation rate, there is no possible justification for doing either. The US Fed targets the personal consumption expenditure price index (PCEPI). The annual inflation rate for May, the most recent month available, was 1.4%, down from 1.7% in April. It has declined steadily since February, when it was 2.1%. The core PCEPI inflation rate the US Fed prefers, PCEPILFE, has also steadily declined since February, when it was 1.8%, to 1.4% in May. I get it that this measure as well as the CPI-U is affected by what may be one-time decreases in prescription drug prices and cell phone charges, but this just doesn’t look like the backdrop to a federal funds rate hike if there really is a 2% inflation target, which the US Fed never tires of telling people is symmetrical.
To me, symmetrical means that over time the inflation rate should be above and below 2% about the same amount of time so that over an extended period the annualized inflation rate was 2% or very close to it. However, looking at the period from January 2012 to May 2017, the annualized inflation rate for the PCEPI is just under 1.2%, and for the PCEPILFE is just over 1.5%. If the US Fed really thinks it is on the right track, it should immediately announce that it is dropping the target rate to 1.5% or 1.25% and cease pretending that it is targeting 2% inflation. It obviously isn’t, nor is there any good reason why it should.
Andrew,
I for one have never understood the 2% target,why not zero?
And I never tire of posting this NYT piece on where the 2% target came from-a bunch of NZ CBers wanting to go home for Christmas….
Incredible….and now it’s set in stone.
Thank you for the link, Dutch. I don’t think I have seen that before although I have seen other articles on New Zealand monetary policy that cover the same material. You may think I am a Canadian chauvinist, but I don’t agree that the 2% inflation target rate started in New Zealand; it started in Canada. The Reserve Bank of New Zealand has always operated with a target range, and in the initial Policy Targets Agreement it was 0% to 2%. So 2% was not the target, it was the upper bound, as 3% is now for the Bank of England. Actually, the current range is 1% to 3%, with a specific mention of trying to keep inflation near the mid-point of the range, so arguably the RBNZ has a 2% target too.
I have heard that a 0% to 2% range because it was believed the upward bias in the New Zealand CPI inflation rate was about 1%, so if inflation were kept in the 0% to 2% range this would be equivalent to price stability, with an average true rate of inflation of nil.
The article says that “Canada, grappling with persistently high inflation, set an inflation target of 2 percent in 1991.”. In fact, the initial inflation-control agreement signed in February 1991, stipulated a target rate of 3% by the end of 1992, 2½% by the middle of 1994, and 2% by the end of 1995. Thereafter unspecified lower target rates would be assigned until price stability was achieved. The new Liberal Finance Minister Paul Martin negotiated the first renewal agreement in December 1993 and insisted that the 2% target rate be maintained, with determination of an inflation rate consistent with price stability put off to another time. Canada initiated the 2% target rate, and if any one man should receive the credit (blame?) for it, it would be Paul Martin. Neither PC Finance Minister Michael Wilson nor Bank of Canada Governor John Crowe, who signed the initial agreement, saw any special role for the 2% rate.
CB intervention; that’s what’s happening in the US.
Hi Andrew
With that size of balance sheet it is intervention on an enormous scale as well.
governance of the people by the Banks for the Banks
get yer popcorn here !
also
http://www.bbc.co.uk/news/business-40703866
Shaun , you called it first , shame there’s no justice in this world 😉
forbin
Hi Forbin
Thank you and yes the shrinkflation saga has been a feature of my work for quite some time. I was intrigued to see the Toblerone reference as at the CPIH public meeting the National Statistician used it as an example of something hard to allow for if for example a triangle is removed. A rather bizarre claim….
” But we are again left wondering what happens should things slow or head towards a recession?”
I think the Fed is too Shaun, hence it’s attempted tightening. Other CB’s should take note…..
Forgot to say the biggest US problem is the debt ceiling – still no agreement on it’s increase and time’s getting on…..
This farce of fiddling economic statistics such as unemployment numbers and inflation is what the new economy is all about – millions of US unemployed are not even counted because they have given up looking for a non existent job or refuse to take a minimum wage job, and most of the jobs created since the crisis of 2008 have been low paid, part time or minimum wage jobs, the inflation numbers are fiddled to hide the fact that inflation is running far ahead of any wage increases you might be lucky to achieve.
And so the game goes on, how long can they keep fooling the people into thinking everything is fine, whilst destroying what little purchasing power they have left, it’s only happening to you, the rest of the economy is OK!!! unemployment is down the Dow is at all time highs!!!, the people behind central bankers assume most people will accept this for decades to come, during which time their standard of living and savings evaporate and they then end up totally reliant on the welfare state.
When will people wake up and realise that central bankers or should I say those behind them, are responsible for the endless struggle that they face every day against the theft of the purchasing power of their wages and savings aided and abetted by a complicit political system and media???
The US Bureau of Labor stats DOES measure unemployed who have given up looking for a job through their U6 measure which includes amongst other groups “discouraged workers” i.e. those who want a job but have given up looking as the exercise seems futile. Here’s the link : https://www.bls.gov/lau/stalt.htm