Parades, fireworks, patriotic songs, 150 million hot dogs consumed, 41 million car trips of more than 50 miles -- and heightened security in reaction to Islamist terrorist threats to disrupt our celebration with murder and mayhem as part of their celebration of their holy month of Ramadan. That’s all part of the celebration of our independence from Britain, which at that time specialized in governing us by executive fiat. One day before the holiday weekend began, the government reported that in June the economy added 223,000 non-farm jobs, fewer than most had expected. Adding to the disappointment was
· a downward revision of 60,000 in the estimate of job creation in April and May,
· failures of hourly wages and the average work week to rise, and
· news that some 432,000 workers dropped out of the labor force in June, driving the share of working age men and women participating in the labor market to the lowest level in almost four decades.
Still, the economy remains on track to add 3 million jobs this year, as it did last year. Kevin Hassett, director of economic policy studies at the American Enterprise Institute, points out that the rate of U.S. job growth suggests that the economy is growing at an annual rate of about 3%, an estimate supported by several other bits of evidence.
Unfortunately the so-so jobs data provide little guide to what the Federal Reserve Board’s monetary policy committee might do to interest rates, or when they will do it. Job and economic growth are slow enough to justify holding interest rates at current near-zero levels, and fast enough to justify a slight upward move later this year.
My guess is that the Fed will hold at current rates until 2016, but the operative word in that sentence is “guess”. I base it on three facts. First, Fed chairwoman Janet Yellen wants to see a reduction in the two million workers too discouraged to seek work or involuntarily working short hours before making a move. Second, she and her colleagues want the current nil inflation rate to rise to something closer to the Fed’s goal of 2%, which it has not done for 37 consecutive months. Third, the International Monetary Fund is lending respectability to the hold-the-line advocates by calling for the Fed to keep interest rates at current levels until next year.
Oh yes, and only a Grinch would raise interest rates in the run-up to or during the Christmas shopping season. The Fed reminds economists at the Lindsey Group of St. Augustine. It “knows it should be virtuous, it just needs to wait a bit longer … constantly kicking the can, … [in] fear of ending the party.”
Here’s why I might be wrong. Many economists and businessmen whom I respect are saying that the figure of 3% understates just how rapidly the US economy is really growing. They expect revisions, common occurrences in the case of GDP figures, to reveal that the economy has been growing at an annual rate of 3.5%, or even higher, which should satisfy Yellen as just about right – the famous Goldilocks level of neither too hot nor to cold. They also expect that monthly job creation will remain above 200,000 for the rest of the year, which would bring the economy to full employment (as traditionally measured) by mid-2016, and put upward pressure on wages and on inflation. Such strength would certainly justify the Fed in beginning to inch interest rates up in advance of inflationary pressures, even if only by a modest one-quarter of a percentage point.
In the end, this dispute over the timing of an interest rate increase is of more interest to traders in shares and bonds than to the performance of the real economy. Corporate decision-makers are already factoring in a modest rise in interest rates next year, which is why they are borrowing at a record rate – get your cash before its price rises – to finance a boom in mergers and acquisitions. Consumers are not incurring high levels of debt that might cause problems should rates rise. Instead, although stepping up spending recently, they have maintained their savings rate at around the 5% historical average. And the current accelerating level of activity in the housing sector can survive the modest and gradual rate increases Yellen has in mind.
Sales of existing homes in May were up for the eighth straight month and were 9.2% above last year, prices for those homes were up almost 8%, and new-home sales were up 20%. Pending home sales, a forward-looking index of sales contracts due to be closed in the next few months, are at their highest level in more than nine years. There is more good news.
· Price increases have slowed in recent months, maintaining affordability;
· The decline in gasoline prices has given consumers more income to devote to mortgage payments;
· Despite a rise in interest rates on 30-year mortgages to the highest level in nine months, mortgage applications are 14% higher than at this time last year; and
· First-time home buyers are accounting for a larger portion of sales than in the recent past, allowing owners of existing homes to sell out and trade up.
Housing is not the only sector producing encouraging news. “US consumers are back in the game in a big way,” TD Securities economist Millan Mulraine told his firm’s clients in a memo. Consumer spending jumped 0.9% in May, the largest monthly increase in almost six years as consumers finally began spending the savings from lower gasoline prices. Vehicle sales led the way, increasing at the fastest annualized rate since 2005. It seems that anecdotal evidence about rising wages – Walmart, McDonald’s and others forced to raise wages at the low end and construction trades at the higher end in order to compete for workers – are a truer indicator of trends in spending power than last week’s report that hourly earnings did not increase in June.
No self-respecting practitioner of the dismal science could conclude this report on such upbeat news, even on a holiday weekend. New headwinds are forming. Obamacare and the President’s decision to mandate an increase in overtime earnings will drive up labor costs and cut into profits. Unions in the auto and other industries are threatening to strike if employers cut benefits to offset Obama-induced cost increases. Softening used car prices just might foretell a cooling of the auto sector. New regulations continue to roll out of several agencies. And America’s retreat from world leadership has created more potential sources of economic disruption than can be chronicled here.
Those problems aside, we just might be on the road to a more robust recovery than we have so far experienced.
Have a wonderful Fourth.