Stronger labor market gives Americans more confidence to spend
October 3, 2016
Think of it as The Loneliness of the Long Distance Runner. That’s how things are shaping up for the U.S. economy, which continues to drudge forward, albeit at a moderate pace, as the rest of the world stumbles.
Looking ahead, there are a smattering of new reports expected this week, including how many new jobs were created in September, which is likely to show the economy sticking to its steady-eddy route. Employment probably grew by nearly 200,000 jobs last month to keep the unemployment rate under 5%, but manufacturers are still struggling to expand and business investment remains soft.
The yin-and-yang performance of key segments of the economy means U.S. growth will probably clock in at around 2% or a bit less in 2016 despite a pickup in the third quarter.
In other words, more of the same. Even though the labor market has been the best it has been in years, the economy is limited to 2% growth—well below the historical 3.3% average. That means it is hard for Americans to get ahead financially even when they’ve got stable jobs and work is easy to find.
Not that most Americans are freaking out. A survey of Americans in September, for instance, showed they are the most confident in the economy and labor market since 2007. Hiring has perked up after a spring lull, job openings are at a record high and layoffs are near the lowest level since the early 1970s.
“At this point, the slowdown in job creation earlier in the year appears to have been an aberration as payrolls have expanded at a solid clip since June,” noted Jim Baird, chief investment officer at Plante Moran Financial Advisors.
When consumers believe their jobs are safe and their financial situation is secure, they are much more likely to spend.
Consumer spending jumped 4.3% in the second quarter to mark the second-highest level of the recovery. Americans probably won’t keep up that pace through the end of the year, but they aren’t scrimping and saving as much as they did after the end of the Great Recession.
What will also help is a labor market that shows few signs of weakening. Consider initial jobless claims — or applications for unemployment benefits. They’ve tallied less than 300,000 for 82 consecutive weeks, the longest such streak since 1970.
Companies are very reluctant to get rid of workers, especially since it is harder to find good help.
“We are increasingly hearing from businesses across a broad set of industries that they are having trouble finding qualified workers, both in high-skilled occupations and in lower-skilled jobs,” said Loretta Mester, president of the Cleveland Federal Reserve, in a speech last week. “And we are now beginning to see firms respond by raising wages.”
If any single indicator can tell where the economy is headed, it might be wages. They’ve risen at a 2.8% annual pace in the first eight months of 2016, well above the average 2.1% clip from 2010 to 2015.
If that keeps up, the annual increase in wages could top 3% and generate momentum for a U.S. economy struggling to break out of a 2% straitjacket. Stagnant wage growth has been one of the hallmarks of the weakest economic recovery since World War II. And similar to Smith, the central character in Alan Sillitoe’s aforementioned short story, the economy has been, almost defiantly, refusing to cross the finish line and offer clearer signs that it is bag on firm footing.
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