Is the Economy Surging or Sleepwalking?

The latest Bureau of Labor Statistics jobs report on November employment gains brought strong evidence of payroll growth, but elicited two decidedly different news responses. About 228,000 workers were added to November payrolls, following October’s 244,000 and well ahead of 2017’s average monthly gain of 174,000.

Relishing the good news, The Wall Street Journal’s print headline read “Hiring Growth Powers Economy.” The more sedate New York Times, it seems, was not quite ready to loosen seatbelts and release trays from a locked, upright position. That paper’s headline read, “After 7 Years of Job Growth, Room for More, or Danger Ahead”?

The key question: Has the economy turned a corner and moved from a sleepwalking pace of 2.4 to 2.5 percent real GDP growth to a more beneficial and sustained 3 percent?

Two consecutive quarters of plus-3 percent GDP growth would seem to support the Wall Street Journal headline. But there is evidence supporting the Times' version of events, too. The bottom line suggests we will continue to see sleepwalking economic growth in spite of some handsome labor market gains.

Those favoring the optimistic viewpoint can point to the recent GDP growth data, positive consumer sentiment reports, strong economic growth in Europe and Japan, and expectations that pending tax cuts and regulatory reform will release economic energy that will nudge GDP growth further upward and then keep it in the 3 percent column.

A more cautious interpretation of the same data sees that employment gains have been in a state of decline since early 2015, and are just now heading north when measured by a five-month moving average. A similar consideration of GDP growth, even after two strong quarters, reveals a four-quarter moving average of 2.6 percent.

Optimists may be quick to point out that that tax reform can bring a positive nudge by increasing investment in new capital. Pessimists may acknowledge this, but also notice that world trade is falling and that White House officials are showing more frowns than smiles when confronting our trading partners.

No matter which of the two positions one might favor, there’s a fundamental constraint that cannot be ignored: GDP growth is determined by summing just two variables, labor force growth and gains in labor productivity. At present, those numbers add up to less than 3 percent.

On top of all this, we have to consider the Fed, and news on that front could come as early as this week.

The nation has already been put on notice to expect a December interest rate increase when the Federal Reserve Open Market Committee meets on Tuesday and Wednesday. And there have been hints that we should expect to see more increases in the year ahead. These increases are based on the expectations that the economy will finally begin to show signs of overheating and that inflation will rise above the Fed’s 2.0 percent comfort level. Current data suggest there is little basis for this concern, at least for the next 12 or so months.

So, what’s the bottom line? Are we entering an economic promised land? No. Is there danger ahead? No. As readers of this column have heard before, the U.S. economy is sleepwalking. Only at a faster pace.