Popular Economics Weekly
It looks like we are returning to the goldilocks economy that prevailed for much of last year—low inflation and interest rates plus continued good job growth. But it also could mean better economic growth that has stayed in the 2 percent range during the Great Recession recovery to date. With Q2 GDP growth revised upward to 3.7 percent, and a solid ADP private payroll jobs report yesterday, we should have higher economic growth for several quarters exceeding 3.5 percent, at least.
ADP, in the July employment report, sees private payrolls rising 190,000 in August, which is a sizable 20,000 below the consensus and right at the low estimate, says Econoday. The government’s private payroll reading was 210,000 in July and is expected to come in at 211,000 in August. But we see the BLS Friday unemployment report at 250,000 plus due to the very low initial weekly unemployment claims of 270,000 lately. There will of course be some seasonal adjustments cutting back payrolls as the summer workforce declines for the back to schoolers, but that is usually corrected in later revisions.
Labor productivity rose a huge 3.3 percent in Q2, as the gain in productivity in turn drove unit labor costs 1.4 percent lower. This is well down from the prior estimate of plus 0.5 percent and is the sharpest drop since the second quarter of 2014. Output rose 4.7 percent in the quarter while hours worked rose only 1.4 percent with compensation up only 1.8 percent, hence the surge in the GDP numbers for output and consumer spending.
China’s slowing manufacturing sector and recent Yuan devaluation will not hurt U.S. growth, nor will the stock market correction. The main reason for China’s slowdown is cheaper manufacturing costs in neighboring countries that is benefiting Vietnam, and even India. Japanese brokerage Nomura has projected Indian GDP growth at 8 percent in fiscal year 2016, in part because of cheaper commodity prices, since India has to import some 80 percent of raw materials for its manufacturing sector. It could even benefit U.S. manufacturers, as China exports are shrinking at the moment (the reason for Yuan devaluation).
In fact, stock values no longer drive most of U.S. growth, a fact that has been known to many macro economists for years. Consumer spending makes up some 70 percent of GDP activity these days. Business investment follows consumer demand, so when consumer spending rises, as it is now doing, so does the demand for business investment. Stocks today benefit holders of stock options for the most part, as well as Flash Traders, and only secondly retirement pension plans over the long run.
What would put icing on my growth prediction would be higher government spending on public projects, now growing far below its historical trend. Should conservatives give up on their attempts to choke off badly needed public spending on infrastructure and R&D (which boosts productivity even more, don’t forget), and is another component of GDP, we can then be assured of GDP growth returning to longer term historical rates for years to come.
Harlan Green © 2015
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