The US Economy Is Doing Great
The US economy is strong and the major indicators gauging its health are trending higher.
Fig. 1 shows that the five major economic indicators – Total Nonfarm Payrolls, Industrial Production, Retail Sales, Disposal Personal Income and the Per Capita GDP – indexed to just before the start of 2001 recession are moving higher after the last recession ended in 2009.
The year-over-year chart, Fig. 2, of these indicators shows that the growth rate of these indicators is above zero too. The Industrial Production declined during 2015 but reversed trend in early 2016. Their year -over-year growth now is, mostly, increasing, except for the employment.
Both of the charts show that following the 2007-2009 recession these indicators are showing continuous improvement.
Employment Is Rising
The employment level has been increasing. The Civilian Employment is 14.4% higher from January 2000 levels (See Fig 3). However, almost all of that increase has from 55-64 year old group, which has increased by 91.4% during this period as compared to 1.8% increase for 25-54 year old group.
The Labor Force Participation has fallen from 66.9% in Q3 2000 to 62.8% in Q2 2018, however, this rate is higher than Q3 2015 when it was 62.5%.
The Weekly Unemployment Claims are continuing to fall (Fig. 4) and are at historically low levels. The 4-Week Moving Average indicates that the trend is not in any danger of breaking. The Unemployment Rate is at 3.9% and below the short-term Natural Rate of Unemployment, which is at 4.62% for the Q 2018 (see Fig 5).
The Average Hourly Earnings are also rising on year-over-year basis. It was 2.77% in June 2018 (see Fig 6). The hourly earnings declined from February 2007 to October 2012 and have been increasing since then. However, the earnings year-over-year increase is not commensurate with the unemployment rate. In April 2000 the unemployment rate was 3.8% and the earnings increased by 3.88%. In June 2000 the unemployment rate was 4.0% and the earning growth was 3.86%.
Considering the inflation, the Median Weekly Real Earning growth is still negative (se Fig. 7), which means that the rising wages are not improving the lot of wage-earners.
Fed Remains Accomodative
The Federal Reserve is raising rates and is expected to raise them at least through 2019. Despite the rising Fed Funds rate, the real rate is still below zero (see Fig. 8), which means that Fed’s posture is still accommodative.
So no wonder the Federal Reserve Board of Governor member Lael Brainard, who used to be a dove, has come around and is making a case for gradual rise in interest rate. In a speech to the Detroit Economic Club in September 2018 she said
So far, the data on inflation remain encouraging, providing little signal of an outbreak of inflation to the upside, on the one hand, and some reassurance that underlying trend inflation may be moving closer to 2 percent, on the other. Core personal consumption expenditures (PCE) prices have increased 2 percent over the past 12 months, consistent with the FOMC’s objective. Survey measures of inflation expectations remain stable in the lower end of the historical ranges, while market-based measures of inflation compensation remain stable at levels above the lows seen in 2016. With various measures of underlying trend inflation having come in below our 2 percent objective over a sustained period, it is important to sustainably achieve inflation around 2 percent to prevent an erosion of underlying trend inflation the next time the economy faces a downturn and the federal funds rate hits its lower limit.14
She goes on to add that:
Over the next year or two, barring unexpected developments, continued gradual increases in the federal funds rate are likely to be appropriate to sustain full employment and inflation near its objective. With government stimulus in the pipeline providing tailwinds to demand over the next two years, it appears reasonable to expect the shorter-run neutral rate to rise somewhat higher than the longer-run neutral rate. Further out, the policy path will depend on how the economy evolves.