Economy

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Monthly Economy Update

John Merrill, Tom Bruce, September 2024

The U.S. economy has slowed from the torrid pace of last year and many think it will continue to slow to either a “soft landing” (positive but below 2% growth) or a “hard landing” (recession). While either remains possible over the next 6-12 months, a third alternative is “no landing”, a continuation of growth at 2% or above.

A slowdown in the post-Covid snap-back growth surge was inevitable. Laid off workers can only be brought back to work once, then new workers must be found. Demographics state that only around 100,000 new jobs monthly can be originated from new entrants into the workforce (18–24-year-olds).

The only additional organic source of new workers would be a net increase in the number of Americans above age 24 that come back to the workforce or enter for the first time. This is incredibly difficult to achieve when there is an average of 10,000 workers leaving the workforce each day to retire. Going forward, it is likely that sustaining workforce growth of even 100,000 net new workers per month will be very unlikely without new immigrant workers.

Even the monthly jobs additions of the recent past were not nearly as good as reported. The government reduced the number of new jobs created in the year ending March 31st of this year by 818,000. This reduced the average monthly increase in jobs from roughly 240,000 to just over 170,000. This is close to its pre-Covid average.

Similarly, wage growth of over 5% has slowed to approximately 3.5%. So, the economic boost from higher wages has also moderated. The pre-Covid average was close to 3.0%.

In a “soft landing” scenario, the average rate of net monthly jobs gains would fall well below 100,000/month and wage gains would continue to fall to below 2%. In a recession, the monthly jobs number would turn negative for a period and overall wage gains would disappear. Either is possible.

However, we believe that the “no landing” scenario is the most likely outcome over the next 6-12 months.

The “no landing” scenario suggests we have arrived at our destination. Job creation and wage gains have merely returned to a more normal and sustainable pace. This is supported by strong retail sales. See Chart 1.

Our economy is benefitting from several stabilizing factors, including:

• Declining inflation and interest rates.

• Increased productivity.

• The wealth effect.

• Government benefits.

Inflation has declined materially and is on a path toward the Federal Reserve’s (Fed) target of 2%. See Chart 2. Bond yields have already followed inflation down and interest rates will soon follow according to Fed Chairman Powell’s speech at Jackson Hole on August 23rd.

Productivity, the increase in output per worker, has experienced solid growth in the past year-and-a-half, well above this century’s average. This means that employers are investing in the tools that make work more productive (including AI) and thus benefit from lower unit labor costs. This allows for both higher wages and higher profits!

Wealth effect. We have discussed different aspects of the wealth effect in our last two Commentaries. In essence, it is the increase in consumption that comes from higher net worths, not higher wages. Household net worth has increased by 53% since the beginning of 2020.

A growing wealth effect is that of retirees drawing on their retirement resources – investments, retirement plans, social security, and other non-wage resources for their spending. The rapidly growing number of retirees (over age 65) already accounts for 22% of all consumption.

Government benefit programs, including Social Security, act as economic stabilizers. In effect, these government programs transfer tax collections mainly from workers and the well off to those they determine need the support. The impact of these transfers can be seen in Chart 3 derived from Census Bureau data.

The chart divides U.S. households into five deciles by total income (wages and investment income). The highest 20% took in 47% of all income but accounted for only 39% of consumption. The lowest 20% of households took in just 4% of national income but made 9% of all purchases.

While many may find fault with various government programs, they have provided significant stability to our economy. The lower income households that have been hurt the most by inflation have benefitted most from government transfers.

Economies are dynamic, ever changing. Most major changes have taken decades to unfold. For example, the introduction of electricity, telephones, and automobiles took enormous investment and time to build out the infrastructure to support them.

The introduction of information technology has happened much more quickly. The personal computer (and spreadsheets), the internet (email and search), and digitalization (from analog) shrunk the timetable from introduction to ubiquity to years from decades. Smart phones were first introduced in 2007 and became the focus for all communications in record time.

Economic models have been much less reliable in this period as they have been slow to adapt to both the widening sources of consumption and the rapid changes of technology.

Disclosures