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Even If It's Growing Faster Than Japan or Europe, Is the US Headed for a Period of Slower Than Hoped for Growth?
12/09/2014 5:55 pm EST
Growth in the world's economies looks slower than it used to be and the US seems to share in this trend, and MoneyShow's Jim Jubak worries growth will be slower than markets, companies, and individuals expect.
Yes, the US economy added a net 321,000 new jobs in November. The initial numbers for October were revised upwards to 243,000 net new jobs from the previous 214,000. So we're now riding a streak of ten straight months with better than 200,000 net new jobs.
And, yes, the growth in the US economy—as measured by GDP—is far and away the best in the developed world and even holds its own against growth in developing economies. Growth in US GDP was revised upwards to 3.9% for the third quarter. Put that quarter's growth number together with the 4.6% growth rate in the second quarter and you've got the biggest back-to-back growth since the end of 2003.
But, I remain worried about 1) the sustainability of US growth, and 2) evidence that 'good' growth in the US economy isn't as fast as it used to be.
On that latter front, the United States seems to share in a troubling global trend.
Growth in the world's economies looks slower than it used to be. It's a trend that has many causes, but it does seem to be a real phenomenon in global growth spots from the United States to China. And to be a big problem in economies such as Brazil and the European Union, which threaten to turn into long-term slow growth zones.
Today, I'll take a quick look at the United States from this perspective. In future posts, I'll move onto China; and then the European Union and Brazil. Finally I'll suggest some of the implications for investors of an extended period of slow growth.
One of the pieces of good news in the November employment figures was a 0.4% increase in hourly wages.
That's enough to bring growth in wages to 2.1% in the last twelve months.
That's good news. And that's a problem.
On average, history says that the rate of wage increases is the total of inflation and gains in productivity.
If the inflation rate in the economy were near the Federal Reserve's target of 2%, and if productivity was growing at something like its long-term trend of 1.5% to 2%, we'd be looking at wage growth of 3.5% to 4%. And not 2.1%.
At the moment, the strong US economy is showing a gap in wage growth of close to 2 percentage points a year.
First, the Fed hasn't been able to get inflation up to its 2% target. At an annual 1.4%, the slower rate of inflation accounts for 0.6 percentage points of that nearly 2 percentage point wage growth gap. I think you can trace a good part of that lower inflation rate to one predictable effect of the Federal Reserve's massive stimulus program. In the US, as elsewhere in the global economy, cheap money has resulted in excess capacity across a wide variety of sectors. Companies operating in industries with excess capacity face intense pressure to cut costs—by outsourcing, by renegotiating wages, by pressuring suppliers for lower prices, by finding internal efficiencies. The end result is falling or stagnant prices in these sectors as companies try to gain market share to make up for lower margins.
Second, the growth rate in US productivity has been falling. Productivity growth over the last seven years has averaged just 1.5%. If you use the long-term average 2% productivity growth rate as your baseline, that's another 0.5 percentage points of the gap in wage growth accounted for. Economists have suggested lots of reasons for lagging US productivity. An aging population where older workers may not be as spry or healthy as they were in their prime and where younger replacements still have a lot to learn. Lagging investment in infrastructure that ranges from under investment in roads and bridges (hard to be more productive when it takes more time to go from Point A to Point B) to capital equipment plays a role. Flaws in the US educational system that include a failure to match skills taught to skills needed by the economy to a failure to expand higher educational opportunities at historic rates certainly play a role.
Third, the share of the national income going to workers has fallen to historic lows. The 65% share of national income going to workers at the end of 2013 was a 60-year low. (The precise share of the economy going to workers varies from study to study, but the trend is clear despite those differences.) More of the gains from productivity have been going to the companies that employ workers rather than to workers themselves. (This seems to be a global trend that can be seen across the developed and developing world, according to data from the Organization for Economic Cooperation and Development.) Explanations put forward by economists for this include, for example, the loss of union power, and competition with low priced imports from countries with lower wages. The split in national income between workers and corporation is also cyclical, so some part of the decline in the worker's share is a result of the protracted period of slower growth during and following the Great Recession.
Whatever combination of explanations you choose to believe, here's the number that worries me as an investor (and citizen, worker, parent, and….)
That's the 'extra'—the Economic Policy Institute calculates—average hourly wage that a US worker would be making now if, in the period from 2007 to 2014, wages had growth at the historic annual rate of 2% inflation plus 2% productivity growth—and if workers' share of the national income had remained constant. (The analysis by the Economic Policy Institute is based on data from the federal Bureau of Labor Statistics.)
I think you can see why that number is pointing at lower growth in the US economy. Consumer spending accounts for about 70% of US economic activity so that 'missing' $3.16 an hour (on average) per worker is money that isn't spent at Target, or MacDonald's, or Home Depot, or over a longer period, buying airline tickets, a car, or a house.
Consumer spending is high-multiplier spending too, so that $3.16 not spent at Target means fewer people employed at Target, which, in turn, means fewer shirts sold at American Apparel, which, in turn, means fewer groceries purchased at Trader Joe's.
That pay not paid, in other words, is growth that didn't happen.
And each year that lost growth, which could compound, doesn't.
The optimistic view of the November numbers on jobs and wages is that we're starting to see trends that will close that gap and restore some of those lost hourly wages.
Maybe. I'd love to believe that. But until I see evidence that November is more than a one-month blip, until I see trends strong enough to eat into that wage gap and the accompanying missing compounding, I'm going to worry about growth at MacDonald's and Starbucks, and about the sustainability of the recovery in home and auto sales.
My worry isn't that growth is about to collapse or that we're about to sink back into recession. My worry is that growth will be slower for a big piece of the future than markets, companies, and individuals now expect.
Spending financed by debt can make up for some of these lost wages, but debt can only take an economy so far, as Brazil and China amply demonstrate. But that's my next post on the potential for an era of slower global growth.
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