United States: Growth remains muted, but finally good news on family income Global Economic Outlook, Q4 2016

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Growth in the first half of 2016 was slow, although preliminary data are pointing to a stronger second half. Continued job growth and increasing family incomes bode well for future demand.

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Although GDP growth of the last three quarters posted very similar rates of around 1.0 percent (at seasonally adjusted annual rates), in several ways Q2 2016 was stronger than either Q4 2015 or Q1 2016.1 As shown in figure 1, the decrease in private inventory investment subtracted a substantial 1.3 percentage points from growth in Q2 2016. Since the contribution from inventory investment generally nets out to zero over time, this subtraction of negative contributions, the largest in an unusually long string of five quarters, is due to reverse soon. Furthermore, in Q2, consumer spending grew sufficiently to contribute 2.9 percentage points to GDP growth, a significantly larger contribution than in prior quarters. Additionally, during the most recent quarter, the contraction in business investment was considerably less than in recent history, and exports grew slightly after contractions in the three prior periods.

GEOQ416_USA_Fig1.jpg

The US consumer’s ability to continue to support growth reflects the continued strengthening of the labor market and, for the first time since 2007, a rise in family income.

The US consumer’s ability to continue to support growth reflects the continued strengthening of the labor market and, for the first time since 2007, a rise in family income.

An improving labor market—but not quite healed

Although the pace of job creation has slowed somewhat in 2016, the improvement in the labor market is evident across many dimensions, even though many measures have not returned to pre-recession readings. Consider:

  • The unemployment rate has been at 5.0 percent or lower for 12 months, essentially on par with the average unemployment rate during the last expansion.
  • The labor force participation rate has stopped falling and has remained stable since the beginning of the year. However, labor force participation is about three percentage points lower than prior to the recession.
  • The number of long-term unemployed (those unemployed for 27 weeks or longer) continues to trend down, as does the proportion of the long-term unemployed. However, both of these measures are still above their pre-recession levels.
  • The median number of weeks of unemployment is down to around 11 weeks, although still higher than the 8-week median just before the onset of the recession, a significant reduction from the 25-week record at the peak of the recession.2

Another area of improvement has been in the more expansive measure of unemployment. The standard definition of the unemployment rate considers only those individuals who are available for work and have looked for work in the four weeks preceding the survey. The Bureau of Labor Statistics also publishes more expansive measures that better capture underutilization, for example, those who want a job but have not looked for a job in the past 12 months, and those who are working part time but would prefer a full-time job. Figures 2a and 2b show a comparison of this more expansive measure with the standard measure of employment. Figure 2a shows that these two measures follow a similar pattern. However, as figure 2b makes clear, there was a divergence in the magnitude of the percentage-point difference between these two measures during the recession—and that difference has been slow to dissipate.

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Improvements to well-being

Thus, even with continued job growth and low unemployment by the standard measure, there remains slack in the US labor market. In late 2014, the gradual improvements began to translate into real increases in the average hourly wage after five years of decline or stagnation. However, averages do not give any information about how these gains are distributed—the average can rise even if the improvement is concentrated among the high earners. Interestingly, the US Census Bureau recently published its 2015 estimates for real median household income and poverty rates, and the news was positive on both fronts.3

As shown in figure 3, in 2015 real median household income rose for the first time since 2007, although the real dollar value of that income remains below the levels of both 2007 and the peak of 1999. The rise in the median points to gains among lower earners. However, in looking at actual measures of inequality, the difference between 2014 and 2015 was not statistically significant, but even if income inequality did not lessen, at least it did not get worse.4

GEOQ416_USA_Fig3.jpg

The Census Bureau’s estimate of poverty rates also showed improvement. Between 2014 and 2015, the composite, or “official,” poverty rate dropped 1.2 percentage points from 14.8 percent to 13.5 percent. The number of people in poverty also dropped by 3.5 million to 43.1 million. The improvements were broad based across demographic groups. However, even with these improvements, the poverty rate is still 1.0 percentage point higher than in 2007.5

Where to go from here?

With these facts in hand, the Federal Open Market Committee (FOMC) of the Federal Reserve Board decided at its September meeting to leave the target for the federal funds rate at 0.25–0.50 percent. The FOMC decided that with inflation still continuing below its 2.0 percent target, it could continue to support the maximum employment goal of its twin statutory mandate since the other goal of price stability remained well in hand.6 Telegraphing the committee’s future intent, the economic projections released along with the statement included an assumption of 0.6 percent for the 2016 aggregate federal funds rate. This implies that the FOMC is aiming for an interest rate increase in this calendar year, most likely in December.7 However, FOMC’s decisions are driven by data, and as of the June meeting, they were still targeting two increases this year.

As noted at the beginning of this chapter, initial data covering July and August indicate a stronger Q3 is underway. Personal consumption, while not looking as strong as in Q2, continues to exhibit healthy growth, and early indicators for business investment and housing are looking much stronger. If these trends hold, a December rate increase becomes even more certain.

Personal consumption, while not looking as strong as in Q2, continues to exhibit healthy growth, and early indicators for business investment and housing are looking much stronger. If these trends hold, a December rate increase becomes even more certain.

For now, the fundamentals of the US economy remain strong, with the risks to the downside focused largely on external events—and the US presidential election coming up on November 8. Since political prognostication is outside the scope of this author’s expertise, I can only comment on the economic policies of the next US president when I know who it will be. For now, it is probably enough to keep in mind that the actual powers of the Executive Branch of the US government are fairly limited; Congressional consent is required for most changes, as any current or former president would attest.