Saturday, April 18, 2015

Economy slowing down, or just taking a breather?

Lots of odd cross-currents going on when you look at the U.S. economy in recent weeks. On the positive side is the fact that unemployment claims remain very low, consistently staying below 300,000 in new claims over the last 7 months, and staying 15-20% below what we saw this time last year. Housing seems to be picking up, with both total sales and prices increasing over last year's totals, and both trends accelerating in recent months.

Even real wages, whose slow growth have long been a drag on the Obama Recovery, have seen a bit of a boost, with real hourly and weekly wages up 2.2% over the last 12 months. All three stats have some interaction, as a tighter labor market should lead to higher wages, and more funds available to buy homes. But the flip side to that real wages increase hints at some of the concerns with the economy, as the nominal change is actually down compared to last year, and it's only a drop in inflation that has led to the "real" increase.

12-mo change, March 2015 vs. March 2014
Nominal hourly wages, March 2014 +2.2%
Nominal hourly wages, March 2015 +2.1%

Consumer Price Index, March 2014 +1.5%
Consumer Price Index, March 2015 -0.0%

Real hourly wages, March 2014 +0.6%
Real hourly wages, March 2015 +2.2%

And a lot of that flat inflation is due to lower oil and gasoline prices, which led to energy prices being down more than 18% for the last 12 months. This is nice for those of us who spend a sizable amount of money driving, but it's also been a big reason why the Mining industry lost more than 22,000 jobs in February and March combined. This was a factor behind the disappointing March U.S. jobs numbers, with only 126,000 gained. That's less than half the average monthly gain of 268,000 jobs over the 12 months before that, and that was in a time when unemployment claims were similarly low to what we've seen recently, so we'll see in a few weeks if March's drawback was a blip, or the start of a jobs slowdown.

A stronger dollar has also played into this trend, not only in lowering gas prices due to cheaper overseas oil, but also in hampering U.S. exporters, whose products become more expensive to foreigners. U.S. manufacturers have only added 1,000 jobs in the two months measured since January, after adding 858,000 jobs in the 5 years prior to that (or more than 14,000 a month). Again, it could be a short-term blip, or an ominous sign of something more.

We'll see how all these contrasting factors play into the GDP report that comes out at the end of this month, and as you can see from this graphic from the Atlanta Federal Reserve Bank, the predictions for 1st Quarter growth have been falling throughout the last 2 months.

Of course, last year GDP actually shrank by 2.1% in the 1st Quarter of 2014 because of the polar vortex winter, then snapped back with increases of 4.6% and 5.0% in the next 2 quarters on the way to 2.5% growth for the year, and the highest single-year U.S. job growth in the 21st Century.

Certainly a continued combination of near-zero short-term interest and high economic growth isn't compatible (even with the higher dollar and lower gas prices), and at least one Fed Governor hinting this week at "boom times ahead" with higher interest rates coming with it. Does that combination then pop the mini-bubbles it seems like we're feeling in tech and housing, to go along with the recent end of the oil and drilling boom, and then set other forces in motion that would cause real damage to the economy.

With these different signals of data, you can see why it's worthy to keep your eyes on these figures over the next couple of months. We're also nearly 6 full years into the Obama Recovery, and at some point in the relatively near future history indicates that there will some kind of sustained decline in growth, if not an outright recession. I just wonder how long from now that'll be, and if we're at or near full employment when it happens.

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