Following yesterday’s Non-Farm Payrolls report, with its +227K print, we’ve now had the best 3-month run of job gains since the recession ended.
Finally, the labour market appears to be humming along, and there are expectations of perhaps a sub-8% unemployment rate by the end of the year.
But there’s a flipside to this.
Quarterly GDP growth is near its most mediocre levels since the recession ended.
And nobody thinks we’re in the midst of a re-acceleration right now.
Yesterday, Goldman Sachs lowered its Q1 GDP forecast to 1.8%.
First, imports increased more than expected, and because this occurred early in the quarter it had an outsized impact on the quarterly average growth rate. On its own, the upward revision to our imports estimate would have taken our forecast for Q1 growth from 2.0% to 1.3%. However, the larger drag from imports was partially offset by a few other positives. First, exports increased more than expected in January, helping lift Q1 net trade. Second, the composition of the trade report showed fewer net exports of capital goods. This implies that more capital goods shipments were used for domestic purposes, and therefore boosts our estimate of business capital spending on equipment and software. Third, state and local government employment was above our forecast, and we therefore nudged up our estimate state and local government spending in Q1 GDP. The wholesale inventories report was broadly in line with our expectations.
So we’re in the midst of sub-2% growth and the best jobs period since the recession began.
This has some economists thinking the recovery is unsustainable.
Obama’s former econ guy Austan Goolsbee told Ben White at Morning Money this week how easily the unemployment picture could start to get worse.
‘Unlike in other V-shaped recoveries from recessions, we cannot go back to what we were doing before … We have to shift away from housing and consumption to exporting and investing and that’s a very slow process … And the world has not been tremendously friendly to enabling us to do that. Europeans have fumbled and fumbled their way to negative growth … And China is slowing while the price of gas is going up. There are definitely some clouds. I’m not pessimistic. I’m just guardedly optimistic. … Productivity grows 2 per cent a year. So if the growth rate slows to around 2 per cent then the job market will stop improving and the unemployment rate will start going back up again.”
Putting it that way does make the whole thing seem a bit unsustainable and worrisome.
On the flip side, one could describe things as economist Karl Smith does: “A GDP-less recovery.”
Remember, coming out of the bust (and even coming out of the 2002 bus) you heard the term “job-less recovery” to describe a period of good headline GDP growth and soaring corporate profits, but the absence of strong labour market gains.
Smith explains that due to a possible collapse in productivity, we could see the exact opposite. Weak GDP, strong job growth.
It should not shock anyone to see labour productivity go into decline over the next year. Not just low number, but robustly negative numbers.
This is because when I look at the world I see a world where technology may rapidly declining.
Now, that doesn’t mean “tech” is rapidly declining. The most powerful technology we had was called “growing computer hardware in Wall Street Office buildings”
Basically we had some Wall Street quants cook-up securitized mortgage products, which we then shipped to China and low and behold they shipped us back Iphones in return.
Growth in that technology has come to and end and there is some evidence that it may begin reversing itself. This will mean technological decline for the US. It, however, would be consistent with a GDP-less recovery.
The kicker is that this could be bad news for the stock market.
This is arguably the iconic chart of the recovery. It shows corporate government and personal consumption (red) hitting brand new highs, while total employment (blue) lags badly from old highs.
For an investors, this is corporate profits paradise: high sales, low labour costs.
But the above-discussed scenario hints at a reversal. Profits and sales mediocre, job gains more robust.
An improving labour market may not be great news for investors.