No Economy is an Island: A More Rigorous Look Under the Hood of the U.S. Economy

Is it possible, in a global economy in which the United States’ principal competitors are experiencing slow growth, disinflation or deflation, wage stagnation or slowing of wage growth, and slumping currencies relative to the US$, that the U.S. economy can be an island of relative prosperity unto itself?

Can the level of global market interest rates, in the aggregate at historically low levels (some short term rates being, in fact, negative) be ignored? Or is something more serious amiss?

Is the U.S. economy, so heavily dependent on consumption and exhibiting similar characteristics (disinflation and anemic growth/reversals in many data points), really be as healthy as equity markets seem to believe it is?

No Economy is an Island

The slide deck above explains what is really going on under the hood of what appears to many to be a U.S. economy moving out of idle and into sustainable traction forward.  Included in these 25 data-packed slides is research and analysis illustrating, among other things that:

  • It was not U.S. monetary policy that was responsible for downward pressure on long U.S. Treasury bond rates. Disinflationary trends since the Great Recession, and the global capital glut/weak demand for capital (accompanied by insufficient demand for production), were exerting downward pressure on interest rates throughout all cycles of the Fed’s quantitative easing.
  • The much-vaunted monthly rate of U.S. job formation, as a percentage of the employable population, is still nowhere near the pace prior to the recession (even that of the so-called “jobless recovery” of the early 2000’s) and is below any monthly percentage recorded from then end of 1994 through the end of 2008 (and, with the exception of the recession of the early 1990’s, since early 1988).
  • Beginning in Q2 of 2014, aggregate payroll growth in high income sectors began to flatten while that of low wage jobs accelerated (Aggregate Payrolls = jobs x hours x wages/hour)―and in December 2014 all aggregate payroll growth actually stalled.
  • A majority of the reported inter-month change in the rate of hourly wage growth is not broad based but, rather, reflects dramatic fluctuations in the wages of the top 17.5% of employees.  Since November 2010, hourly wages of such supervisory employees grew at a rate 28% higher (up $4.09/hour cumulatively) than the wages of the lower 82.5% of all employees (up $1.57/hour), the so-called Production and Non-supervisory Employees category.
  • Annual incomes in U.S. low wage sectors are very weak. In the leisure and hospitality sector, annual incomes average only $19,256 and are not much more (after taxes) than the total of unemployment benefits plus food stamps that long-term unemployed workers received before those benefits were withdrawn in 2014.
  • In nominal terms, U.S. household debt has only fallen by 4% since the peak of the credit bubble. Debt-to-disposable-income has fallen to 106% from 134% – yet is still far from earlier norms (87% in 1995 and 69% in 1980).
  • After falling from its mid-2008 bubble-era peak, U.S. consumer credit has skyrocketed past its former high by about 22% through Q3 2014.  The increase in aggregate consumer credit since its Q3 2010 low equals about 24% of the increase in GDP during the same period.
  • Disinflation/deflation and the strong US$ is already impacting U.S. economic performance. The U.S. has seen inflation at rates below the FOMC’s target 2% rate for two years.  The core goods portion of the CPI has been negative for a year and a half.  Inflation in all items other than shelter deteriorated markedly in the second half of 2014, well before the oil collapse.

Finally, I present my conclusions regarding where the U.S. is likely headed through 2015 and why the prevailing meme of U.S. economic decoupling from global economic phenomena is not sustainable. As to the economic (un)health of the rest of the world, there can be little serious debate.  That the U.S. is able to be an island apart in a world so thoroughly globalized and mired in oversupply as that of the present day, is sheer folly.  Policy based on such a view should be more assiduously avoided than has been the case in recent years.