What Happened to the Economic Engine?
Last quarter’s Economic Situation began with a question. Has the US economic engine lost its steam? This report provides an answer: It surely looks that way, at least for now.
Since March, we have seen flat to weak data on retail sales, low employment growth—with some recovery in April, pale manufacturing activity, low export sales, and, of course, diminished activity in the US oil and gas regions. The slowdown is associated with faster money printing presses in Europe and falling economic growth in China and Asia. These lifted the dollar’s value, improved Americans’ ability to buy the world’s goods, but cut down on exports. We see the effects of the stronger dollar on sales by the S&P 500 firms in the accompanying chart. The two series move almost in lockstep.
Meanwhile, the Fed, which three months ago seemed resolutely determined to nudge up interest rates before the onset of summer, is now keeping its powder dry while not even giving a hint that it sees the white of the eyes of oncoming inflation. From the way things look now, interest rate increases will be a winter activity. Look for a first upward nudge near the end of the year, if in 2015 at all.
The Productivity Slowdown
Slow growth data were amplified on May 6, when the Bureau of Labor Statistics released a productivity growth study. The report indicated that for the last 10 years, productivity growth has averaged just 1.4 percent.
Progressive Policy Institute president Michael Mandel responded: “Based on today’s release from the BLS, ten-year productivity growth has now plunged to 1.4%, the lowest level since the 1980s. By comparison, ten-year productivity growth was 2.2% when Bill Clinton left office at the end of 2000, and hit a high of 3% at the end of 2005.” The accompanying Progressive Policy Institute chart tells the tale.
As Mandel and the chart indicate, it is impossible to have meaningful growth in wages in a low productivity growth economy. Indeed, in recent years, wage growth has captured a larger part of productivity gains than in the past.