The gap in economic performance between the U.S. and overseas is widening, holding U.S. rates down. However, the data brings as many questions as answers.
By historical comparison, the twin Institute for Supply Management surveys rising in August to 59 (manufacturing), and 59.6 (services) have reached inflationary overheating. But this is 2014, not history, and the tidy cyclical patterns of the 50 years after World War II no longer apply.
Yet some patterns must apply, especially this one: At some point of U.S. economic growth and shrinking pool of labor, wages must rise. Right? Nothing new might happen in a globalized world, like substitution of overseas labor. Right.
Long-term rates were poised to rise today on an August payroll report expected to surge since the ISMs did. But payrolls did not perform, rising only 142,000, a little more than half the forecast. The cyclical boys, wrong ever since 2009 (and longer), have dismissed the payroll report as an aberration. Could be.
But the aberrant sword cuts two ways: August wages jumped out of stagnation to a 3 percent annualized increase. So long as we’re in the land of “should be,” here is the Fed’s greatest fear: that the job market is already too tight, tight enough to drive wages up faster than gains in productivity, the certain prescription for inflation.
Adding to that concern this week: An elaborate Fed staff study concludes that the decline in the workforce is structural, old folks and the low-skilled leaving for good, the labor pool not responsive to the higher wages in a good recovery.
I don’t believe that conclusion for a second, by the way. If we start seeing better jobs and wages, citizen workers will come out of the U.S. woodwork.
A dart-throw into middle-ground: The hot economic stats feel like a sugar high. Auto sales, fueled by trash lending and giveaway discounts that are pulling future demand forward, are running at a pace of 17.5 million a year, stronger than real absorption can support.
The stock market is now an unsustainable propellant. Bank credit is roaring along at a 9.5 percent annual pace, sustainability unclear. And if everything is so rosy, why is housing not attending the cyclical party?
No question, the U.S. economy is doing better, but low-slope. New question: What effect will a slowing outside world have on the U.S.? The answer lies in a loopy game of rock-paper-scissors, trying to figure out which forces are stronger than others.
The most important element in U.S. strength in the last few years: cheap energy, more responsible for the U.S. manufacturing rebound than any other element. U.S. businesses pay one-third as much for electricity as competitors in Germany. That’s a durable boost here, which will last so long as current extraction technology is economic at today’s energy prices.
The U.S. economy is less dependent on exports than any. Slowing overseas appetite for our stuff thus does less harm to us than anywhere.
Weakness overseas is so deep, central banks in such extreme action, that super-low yielding U.S. bonds and mortgage-backed securities look like all-time cheap deals. Perversely — very — when the Fed finally does begin to tighten it may have to force up short-term rates more than it usually would versus U.S. economic activity, because market-driven long-term rates will stay down.
Or, the unthinkable … the Fed will begin to sell its bond and MBS trove.
If you’re in trouble, as the outside world is, and heavily reliant on exports, as all of our overseas competitors are, you devalue your currency. The European Central Bank’s tiptoe into quantitative easing this week will have as little (or less) effect as the Fed’s QE3.
At the end of 2008, the effect of QE1 here in the U.S. was miraculous, knocking down long-term rates. Since then, both here and in Europe, long-term rates are already dead low, and QE is ineffective — except to weaken currency. The euro dropped below $1.30 on the ECB news, and going lower.
Others will follow, must follow, including Japan and China. The effect is deflationary here. Prices of imported goods are falling, and the devaluers are exporting their wage structure and unemployment along with the goods.
Overseas weakness will limit any inflation threat, and not abort U.S. recovery. But our recovery still doesn’t amount to much. Watch wages and housing. True acceleration lies there.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
