Economics has two primary faces: The first is micro economics — the study of supply and demand with respect to the products and services we offer, it tends to be front and center in our day to day world. In our “day jobs” we don’t generally have time to seriously examine the second, but it can be important if we want to be poised to anticipate and prepare for any pending climate change in the overall economy. The Chief Economist/Co-Founder of Moody’s Analytics, Dr. Mark Zandi, offered a thoughtful look at our U.S. economic climate at the ELFA Convention.
As of August 2018, the U.S. economy hit a milestone when the total number of job openings (7 million) exceeded the total number of those unemployed (6 million). For most of the economic recovery this past decade, real wages have contracted 0.5% given that wage growth has generally been around 1.5% while inflation has hovered around 2%. This year appears to be different. While inflation has been held in check at 2% in 2018, it is projected that wages will increase by 3%, resulting in a net 1% real economic gain. It is predicted that by mid-2019, the unemployment rate will fall to 3% for the first time in close to 70 years. This event is unique. Since U.S. labor statistics have been tracked there have been only two periods when American unemployment has been this low — both when over 10% of the work force was serving in one of the branches of our armed services: World War II and the Korean War. So, 2019 will be the first time ever in U.S. history when 97% of the American workforce is employed without a military draft siphoning from the labor market.
As with most economists, it is important to wait for the semi-colon followed by the word “however”. The already understood good news presented by Dr. Zandi was welcomed and affirmed; however, he proceeded to unpack, “What Could Go Wrong?” which shined a spotlight on several potential economic derailing themes. The following is a summary of three which he discussed.
- The ability to ratify a tax cut stimulus was only possible with an elected legislative governmental branch of the same party as the executive branch. The likely swing in party control of Congress in mid-term elections will likely create polar positioning rather than bi-partisan collaboration. If there is a change in majority party within the house or Senate, until the 2020 presidential election we could anticipate obstructionist politics, which likely preclude any economic stimulus, if required.
- A sustained trade war could have a stifling effect on the economy. President Xi Jinping of China and President Trump are approaching a “prisoners war” and each need an opportunity to de-escalate the rhetoric for them to respectfully “save face” — significant to the U.S. president personally and to the Chinese president culturally. A protracted season of tariffs would be felt by the typical American consumer, impacting the price of infrequently replaced large-ticket purchases and white goods items with Chinese manufactured content.
- We are faced with the imperfect art of Federal Reserve economic calibration to a balanced economy reflected by nominal inflation and full employment. Whenever the U.S. experiences unemployment lower than full employment, generally considered to be 4.5%, the economy is prime for a correction: the economy overheats, inflation accelerates, the yield curve inverts and economic instability appears. Historically, a dramatic correction is triggered by a major event: the savings and loan/junk bond crisis in 1990; the dot-com bubble in 2000 and sub-prime mortgages coupled with illiquidity from lack of commercial paper access in 2008. In each of these crises, it became evident that, “If something is growing like a weed, it is a weed.” What will that weed be this time? We know that every post World War II recession has been preceded by a yield curve inversion. There are limited levers available to the Federal Reserve to artfully stabilize the U.S. economy. There is no body of statistical evidence that suggests they have been successful to enable a smooth soft landing.
While 2019 looks to be okay, Dr. Zandi warned to watch out in 2020.
