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In the Slow Growth World: Is “Full” Employment No Longer a National Priority?

At the end of January, we learned that the preliminary GDP growth estimate for Q4/16 was 1.9% and that labor costs and wages rose less than expected (despite the fact that the minimum wage rose in 19 states). Given the “animal spirits” so evident in the post-election markets, such data may be a shock to many.  But, if you are a reader of my columns, it shouldn’t have been a shock to you.

Sentiment Up – Hard Data Mixed
The “sentiment” indexes have all remained elevated.  For example, The University of Michigan’s Consumer Sentiment Index for December (98.5) has not been this high since 2004.  The similar index from the Conference Board fell back in January to 111.8 from 113.3 in December.  Still, 111.8 is quite a high number.  The “hard data,” on the other hand, is mixed.  Besides GDP and labor costs, December new home sales fell 10.4%, housing starts fell 4% while existing home sales were down 2.8%.  Retail sales looked okay in aggregate, but if you remove gasoline (the rising price of which makes it look like consumers are voluntarily spending more) and auto sales (which were significantly incentivized), December retail sales showed little growth.  January’s net new job creation number, at 227,000 (Establishment Survey), looks good, but below the surface, the unemployment rate actually rose (from 4.7% to 4.8% for U3, and from 9.2% to 9.4% for the U6 measure), and there was a prior month revision of -39,000, meaning, on net, jobs grew 188,000, much closer to consensus than the 227,000 headline. In addition, the Household Survey, from which all of the unemployment ratios are calculated, actually saw a net job loss of 30,000.

Back to sentiment, the January ISM Manufacturing Index rose to 56, the highest level since November, ‘14, yet the industrial production index itself has been in a funk for the past two years with no signs of a breakout to the upside, and capacity utilization, at levels barely over 75%, remains at or near recessionary levels.  So, while sentiment is clearly ebullient, the reality is that the economy remained sluggish in the post-election period, and likely continued sluggish as we entered Q1.

The Nuance of “Maximum” Employment
As I have written in just about every column for the past year, there are very powerful headwinds blowing against economic growth – including significant demographic and productivity issues.  The new Industrial Revolution (technology) is yet another structural headwind to economic growth.  In her address to the Commonwealth Club of San Francisco on January 18th, Fed Chair Yellen referred to the U.S. economy as being near “maximum employment.”  Note that she did not say “full employment.”  She went on to explain: “Then there is structural unemployment… sometimes people are ready and willing to work, but their skills, perhaps because of technological advances, are not a good fit for the jobs that are available.  Or suitable jobs may be available but are not close to where they and their families live.  These are factors over which monetary policy has little influence.  Other measures – such as job training and other workforce development programs – are better suited to address structural unemployment.”

Is Full Employment Achievable?
According to the Job Openings and Labor Turnover Survey (JOLTS), more, than 5.54 million jobs were open in January, a number that has been rising for more than a year.  The official U3 unemployment rate (4.8% in January) indicates that there are 7.5 million unemployed.  But if you count the unemployed, underemployed, and discouraged, that number is closer to 15 million (the U6 unemployment measure). Yet, as pointed out above, there are 5.54 million unfilled jobs, and the biggest business complaint is that they can’t find qualified candidates.  The rise in sentiment likely caused some discouraged workers to begin to search again in January.  And, while the job creation number indicates that some found jobs, the rise in the rate means many did not.  Could it be that technology has advanced so fast that job skills can’t keep up? And, do we now have a new economic concept, “maximum employment,” because “full employment” is not achievable in the current economic environment?

It appears that the U.S. isn’t investing enough in job training, transitioning, or matching skilled workers with suitable jobs.  According to Wall Street economist David Rosenberg, public spending on job training and related functions is 0.1% of GDP, half of what it was 30 years ago.  Unfortunately, there is little recognition of this issue in the business media.

These headwinds are not cyclical issues that can be solved in a quarter or two or even in a whole Presidential term.  Nor does it appear that these problems can be solved if only GDP could grow a little faster.  In fact, these are the very issues keeping such growth tepid.  The reality is: slower than desired economic growth is the hand that we have been dealt.

For those readers who are also investors, the markets appear to have priced in an almost immediate 20%-30% profit growth for 2017 – but they seem to be ignoring the reality of a slower growth world.


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