Wage Growth Wanting
by Regions Financial
Sept. 4: One of the more notable elements of the current economic expansion, now in its ninth year, has been stubbornly slow wage growth. Despite what is now the longest string of consecutive monthly increases in nonfarm employment on record, now at 83 months and counting, and a headline unemployment rate of 4.4%, year-on-year growth in average hourly earnings remains stuck in a fairly narrow range more recently centered around 2.5%. This is, most analysts would agree, shy of the rate of growth that would be expected at full employment, and the lack of a meaningful and sustained acceleration in wage growth at this point of the expansion is somewhat puzzling.
The list of possible explanations for the behavior of wage growth is a long one. Some of them, such as those based on the notion that the economy is only adding low-skill, low-wage jobs, or that the economy is only adding part-time jobs, can be dismissed out of hand, as there is simply nothing in the data to support such contentions. Other possibilities are that there is considerably more slack in the labor market than is implied by a 4.4% headline unemployment rate, that the unemployment rate associated with full employment is lower now than has been the case in the past, and that an anemic trend rate of labor productivity growth is acting as a drag on wage growth.
While we don’t see any single one of these last few as “the” explanation for persistently sluggish wage growth, we think all are partly in play, as we have often noted. We also think the shifting generational mix of employment is playing a role in sluggish wage growth as measured in the aggregated data. In other words, as members of the Baby Boomer generation leave the labor force in larger numbers and are replaced by younger (less expensive) workers, reported wage growth is suppressed. To the extent this is the case, it will be a lasting drag on measured wage growth as we are still in the early phases of this generational shift.
-- Richard F. Moody
U.S. Investment Policy Committee Notes
Sept. 6: We remain encouraged that stocks have successfully steered around domestic and geopolitical potholes that would otherwise have swallowed up less-confident markets. Investors continue to be encouraged by an improvement in global economic growth projections and don’t seem to fear—at least for now—the prospect of balance-sheet unwinding by the Federal Open Market Committee and the curtailment of quantitative easing by the European Central Bank.
In addition, we believe this bull market will not be blown off course by the aftermath of Hurricane Harvey or the impending uncertainty surrounding Irma. Indeed, the trauma from these tropical storms will likely boost domestic economic activity and maintain pressure on local unemployment rates. The resulting fiscal aid, however, which should support share prices in the near term by circumventing a government shutdown over a debt-ceiling showdown, is expected to increase the already hefty U.S. debt load.
-- Sam Stovall
Monthly Economic Chartbook
by Maria Fiorini Ramirez, Inc.
Sept. 5: While tax reform/infrastructure spending remains in the background, Congress returns to session with a need to raise the debt ceiling and fund the federal government. While anything is possible with a dysfunctional Republican Congressional majority and an unpredictable president, our basic assumptions at the moment are that the debt ceiling will be raised sufficient to give a few months breathing room (in tandem with disaster relief funding for Texas), and that the government will be funded through calendar year-end or a bit later with a continuing resolution. After these immediate needs are dealt with, immigration-related issues as well as intraparty warfare on the Republican side may complicate negotiations both on the budget and the debt ceiling.
As for the economy, we look for Q4/Q4 real GDP growth of 2.5% this year, with second half growth of about 2.8% comparing to an average of just over 2% in the first half. We have penciled in a 2.4% pace for growth in 2018. With the labor market continuing to tighten, we do not anticipate the recent slowdown in core inflation to last for very long. After a period of stabilization, we expect y/y rates to begin to drift higher during much of 2018. After a 2.2% rise in 2016 (Q4/Q4), the core CPI is forecast to increase by 1.6% in 2017 and by 2.2% in 2018. We expect just one more Fed tightening move this year (in December) due to a more cautious stance in the face of below-anticipated inflation.
While we have retained our projection of three tightening moves next year, the possible market impact of balance sheet reduction and the likelihood of a new Fed Chair heightens the uncertainty surrounding that forecast. Moreover, the December move is by no means a sure thing, with policy makers needing at a minimum to see core inflation stabilize before moving again.
While our near- to medium-term view is reasonably optimistic, there are important risks that could significantly alter the outlook. A major wild card is trade policy under the Trump Administration. If protectionism is more bark than bite, then no harm, no foul. However, if significant protectionist policies are enacted, retaliation would likely occur and the consequent hit to global trade would weigh on growth and on business sentiment.
Another critical uncertainly is fiscal policy. The failure of the Republican Party to agree on a replacement for Obamacare does not bode well for their ability to construct a far-reaching tax reform bill. Nor does it suggest that the debt ceiling will be increased without maximum drama, or even that crafting a fiscal 2018 budget will be as easy as it ought to be with a single party in power.
-- Joshua Shapiro
FBN Daily Market Missive
by FBN Securities
Sept. 7: Traders mostly yawned when reading that the Democrats and Donald Trump will raise the debt ceiling enough to fund the federal government without the use of extraordinary measures through mid-December. The extension is ostensibly immaterial, for both sides of the aisle will get to play this dangerous game of chicken again in only three months. For those members who sit on the FOMC, the news, though, allowed for a sigh of relief.
The Brexit vote and the U.S. elections almost assuredly prevented the committee from lifting overnight rates until December, for all of 2016. If Congress could not reach an agreement that would avert a default after Sept. 30 prior to the central bank’s scheduled meeting in 13 days, then Janet Yellen would have at least considered delaying the implementation of the plan that pares her $4.5 trillion balance sheet. With this crisis apparently averted in the short term, the chair has a green light to begin the paring process without hesitation, and Fed Vice Chairman Stanley Fischer’s unexpected resignation should not derail the announcement of this action.
While Washington will theoretically run out of cash two days after the FOMC’s December meeting to lessen the likelihood of a third hike this year, the slowing of the reinvestment process presents the biggest secular risk for the rally.
-- Jeremy Klein
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