Mixed Signals for the U.S. Economy

Guest Post by Director Greg Kyle

In a recent speech, Federal Reserve Chair Janet Yellen expressed her view that interest rates would likely rise later in the year. However, economic signals have been mixed, and that could potentially push any rate increase into 2016. Yellen did state that “the U.S. economy is well positioned for continued growth,” but she also pointed out that there was recently softness in some economic data. During this ongoing recovery, residential construction remains low, business investment is modest and household spending low.

Much of the economic softness could be attributable to the slow pace of the jobs recovery after one of the worst recessions to hit the U.S. since the 1930s. At the nadir of the Great Recession, nearly 8.5 million people lost their jobs. It took more than six years for employment to come back to pre-2008 levels. As can be seen in the chart below, that was the most severe job recession – both in terms of jobs lost and time to recover – in the U.S. in nearly 80 years.

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In her speech, Chair Yellen identified the top two lingering issues in this recovery as the jobs situation and wage growth. Although the headline unemployment rate of 5.4% does look encouraging, it bears keeping in mind that the unemployment rate “does not fully capture the extent of slack in the labor market.” As we’ve written about before in our Bates Strategy Insights Report, the headline number only captures those people who are reported to be actively seeking work. It does not capture those who have become discouraged and are not seeking work, or those who are only part-time employed yet want to work full-time, but cannot find full time jobs. That number – known as U-6 – is still quite high, at over 11%. This compares poorly to the 8% range prior to 2008. According to Yellen, the pace of wage growth in this recovery has also been disappointing: “In the aggregate, the main measures of hourly compensation rose at a rate of only around 2 percent through most of the recovery.”

The biggest hurdle for Yellen and the Fed is forecasting the pace of economic recovery going forward. Although the FOMC expects the U.S. economy to grow at a 2.5% pace over the next couple of years, because of the uncertainty over job growth and business output, that forecast is “highly uncertain.”

If the jobs situation remains lackluster, consumers will be modest in their spending. If consumers are modest in their spending, businesses will be hesitant to increase output. If businesses are hesitant to increase output, job growth could be light. One could really call this a circle of uncertainty. Over time, each one of those components will likely rise, but do not expect either consumers or businesses to significantly increase their spending in the face of the economic uncertainty.