This week new research was released on the current makeup of the US middle class, the continuing commodities price slump, other — more general — US economic indicators provide a somewhat less murky, if still muted, projection of the health of the US economy over the next year or two.
Said Bill McBride in his highly-regarded economics blog, CalculatedRisk.com Tuesday, “Last year, 2014, was the best year for employment since the ‘90s, and 2015 will be the 2nd or 3rd best year since the ‘90s.”
McBride goes on to look at US single-family housing starts, federal and state employment data, budget surplus, household debt, and architecture billings to up- date his 2005 US economic analysis.
Other reports out this week are less equivocally bullish.
US Economy and Economic Indicators
The US dollar slipped against the yen and the euro this week after fresh data showed that American consumers picked up their spending and US business prices rose last month, but not sufficiently to shift thinking on the pace of Fed tightening.
The dollar weakened against the common currency, as one euro bought US$1.0965, from US$1.0955 ahead of the data, up 0.2 per cent versus the buck for the session.
Meanwhile, Another month of strong jobs growth (up 211,000 in November, unemployment at an eight-year low) highlighted the continued good health of the US economy.
US Trade Deficit
The US trade deficit widened to US$43.9-billion in October, largely as a result of sliding exports, which fell 1.4 per cent in the month and were down nearly 7 per cent from year-earlier levels. The combination of weak foreign demand and a rising U.S. dollar – pushed up by the relative strength of the US economy and the prospects of Fed interest rate increases – have slammed the brakes on US exports.
Meanwhile, U.S. imports fell for a third consecutive month – suggesting the lack of export growth may be moderating economic activity at home. That surfaced in the trade numbers also released on Friday for Canada, which relies on the U.S. market for about three-quarters of its own exports. Canada’s trade deficit ballooned to $2.8-billion (Canadian) in October – and the culprit was a 2.8-per-cent slump in exports to the United States.
Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said the U.S. economy’s reliance on exports is small enough – exports are equivalent to just 13 per cent of GDP, compared with 33 per cent in Canada – that its economy can weather weak demand out- side its borders fairly well, as long as its job-creation engine is still humming.
US Purchasing Managers’
Index
At the root of the slowing is the export-intensive manufacturing sector. The Institute of Supply Management’s manufacturing purchasing managers’ index, a closely watched indicator of U.S. factory activity, fell to a post-recession low of 48.6 in November. Any reading below 50 indicates a contraction – implying that U.S. manufacturing output has actually slipped into decline.
US Employment
Another month of strong jobs growth (up 211,000 in November, unemployment at an eight-year low) highlighted the continued
good health of the U.S. economy, and likely gave the Federal Reserve the last piece of evidence it needs to raise interest rates at its meeting on Wednesday.
Full employment is consistent with a 5 per cent unemployment rate, which has already been achieved, and a 9 per cent underemployment rate. Underemployment includes the unemployed, part-timers who want more hours, and potential workers that have stepped out of the workforce and thus are not counted as unemployed but say they want a job. This is the so-called U-6 unemployment rate, which currently stands at 9.8 per cent. On a full-time equivalent basis — translating the part-timers into full-timers — it is about 9.6 per cent.
US Wage Growth
Wage growth is up nearly half a percentage point over the past year, well over the near 2 per cent year-over- year growth that had prevailed since the recession.
Wage growth is even stronger than indicated by the BLS wage data. The BLS calculates wages based on reports from establishments that average pay across all their employees. Measured wage growth is being depressed as many lower-paid millennials are coming into the workforce, while higher-paid boomers are leaving it. The tighter labor market also means that those now finding jobs are likely less productive and thus lower-paid.
Said Mark Zandi in TheStreet.com Wednesday, “Wages are ultimately expected to reach a 3.5 per cen growth rate. This is equal to the sum of inflation, which is expected to be near the Federal Reserve’s 2 per cent target, and 1.5 per cent trend labor productivity growth. At this pace of growth, labor’s share of national income will stabilize; labor’s share has been shrinking more or less since the early 1980s.”
US Construction Activity
Demographics and household formation suggests starts will increase to around 1.5 million over the next few years, said CalculatedRisk Tuesday. That means starts will probably increase another 40 per cent or so from the October 2015 level of 1.06 million starts (SAAR).
Residential investment and housing starts are usually the best leading indicator for the economy, so this suggests the economy will continue to grow in 2016.
Even though starts have more than doubled from the bottom, starts are still way below the average level of 1.5 million per year from 1959 through 2000.
US Household Debt
The New York Fed announced that household debt increased by a ro- bust US$212 billion in 3Q 2015. Both mortgage and auto loan originations increased, as auto originations reached a ten-year high and new mortgage lending appears to have finally recovered from the very low levels seen in the past year.
The overall Debt Service Ratio has been moving sideways and is near the record low.