In the second quarters of three successive calendar years—2010, 2011 and 2012—improvements in the U.S. economy that generated hopes for economic rebirth were dashed by what seemed to have been economic forces of gravity that mysteriously pull glimmering positive trend lines downward just as the crocuses of spring are pushing up through the earth’s soil.
In each of those years, for example, the rate of growth in aggregate U.S. payrolls spiked and then declined, leaving hand wringing for much of the balance of the year. Hourly wage growth attempted to turn positive on a “real” (inflation adjusted) basis, only to be dragged back into the same pattern of stagnation or decline that has been characteristic of each of the last dozen years, save for the years of the Great Recession itself, when the U.S. experienced deflation and real wages rose as a result.
And sometime in the autumn of each of 2010 and 2011, people (myself included) from every school of economic thinking penned white papers, articles, op-eds in a cacophonous chorus prescribing—in the aggregate—a bipolar set of solutions for aiding the economies of the U.S., and the rest of the developed world, to achieve escape velocity from what can be characterised as a perennial pattern of printempal slump.
There are always other factors at play, the “if only’s,” that pose distraction: If only Europe wasn’t going to hell in a hand basket, if only the U.S. had a government that could achieve consensus on matters of extreme importance, if only the consumers would click their collective heels together and believe enough in economic recovery to go out and “do what they’re supposed to do.”
But the fact remains that consumers gave it their all over the past seven months or so. As my post on consumer credit, of March 22, 2012, demonstrated the consumer bought into this last round of false-recovery hook, line and sinker—going back towards record-setting levels of unsecured debt in order to continue to show up at the malls and the auto dealers (to say nothing of colleges). The “confidence fairy” successfully covered consumers with pixie dust and—despite Europe and a dysfunctional U.S. government—the 70% of our economy that is dependent on consumption of goods and services was given every benefit of the doubt.
And yet here is where we have, once again, ended up—confidence misplaced and the engines of recovery once again threatening to stall in unison and send us crashing into the turf.
I have been closely watching two Bureau of labour Statistics’ data points over the past several years: average hourly earnings and the index of aggregate weekly payrolls (in both cases for all private, non-farm workers). The index of aggregate weekly payrolls, by the way, is a measure of all the total payrolls of all establishments in the country—all the money paid out to workers. My hypothesis is that each time that average hourly earnings show any acceleration in the rate of growth, whatever growth in aggregate payrolls that we associated with a burgeoning recovery became short-lived and, in fact, fell sharply thereafter.
The May 2012 Employment Situation report released on Friday has given me enough data to confirm at least some of what I have been thinking in this regard. That is that the ability to absorb the massive amount of underutilized labour in the U.S. (both within and outside of the official labour force tally) appears to be conditioned on the price of labour falling sufficiently to offset at least some of the unprecedented global wage imbalances within the competitive universe of manufacturing and, to a lesser extent, service industries.
But as the Federal Reserve Bank of San Francisco pointed out in an excellent paper in April of this year on wage growth and the impact of nominal wage rigidities (the tendency of employers not to actually reduce—and employees to resist the reduction of—nominal wages, especially during hard times), rather than falling in nominal terms to reflect the excess availability of labour, they have actually risen. This is not to say that wages haven’t fallen in real (inflation adjusted) terms—they were doing so before the Great Recession and resumed doing so again after the brief bout of price deflation we saw during the recession. But it is nominal wages (combined with the value of the dollar to an extent) that makes the U.S. economy more or less competitive globally. And the aforementioned wage rigidities are not helpful—and, I would argue, are about to be tested again.
The below graph shows a history of the 3-month moving average growth rates of both hourly wages and aggregate weekly payrolls. It is annotated in a self-explanatory manner, so suffice it to say that in each of this year and the past two the acceleration of payroll growth may have been undermined by slight upticks in hourly wage growth. And, in fact, a flat or down-trending wage environment may have fostered hiring. The spread between the two rates of growth is shown as a purple dotted line on the graph. Put simply, the employment picture is better off when the dotted line is between the two other lines (the closer to the red line the better) and worse off when it falls below. Note that the dotted line, together with the growth rate for aggregate payrolls has once again fallen off sharply.
Source: Bureau of labour Statistics (please click to enlarge graph)
The concerns I have here are principally twofold:
- Structural issues are not bringing the people willing to work the cheapest (those who have been out of work the longest) back onto payrolls at lower wage rates because of employers’ resistance to hire them.
- The very nature of the present crisis is inherently deflationary, and developed countries’ central bank policies are vigorously attempted to counteract those deflationary pressures. But as extraordinary monetary easing is not flowing into real economies beset by an already existing glut of capacity, but is rather inflating commodities—we find ourselves with price inflation in food and energy that is ultimately not able to be offset by increasing wages (the latter being under global pressure from emerging markets) and we then suffer the stalling out of growth.
We have allowed hopes for revival of developed world economies to transcend the reality of their condition—facing enormous competitive and deflationary pressures and deep in unyielding indebtedness, at both household and governmental levels, that we can’t reduce through austerity in times of sub-par economic activity and, because of anemic business conditions, can’t grow ourselves out of either.
While we sit about obsessing over paltry levels of job creation and an unemployment rate that fell during late 2011 and early 2012 as much because of departures from the labour force than from job growth, we ignore the real nature of employment in the U.S. and Europe (and to a lesser extent in Japan, which offers a cautionary demographic conundrum as well): Near historically high levels of underemployment (those working few hours combined with those working none), labour force participation levels and the ratios of those employed to total population that are abysmal, and whatever new jobs that are created being overwhelmingly in the lowest paying ranks of the service sectors (a phenomena shared with Japan—despite its vastly lower headline unemployment rate).
While headline unemployment in the European Union, at 10.25%, is at a post-recession high, and in the peripheral nations of the Eurozone averaging over 17%, the fact remains that—even with a lower official rate of unemployment—the U.S. has only 114.8 million full time workers and 27.5 million part time workers supporting a population of some 315 million people (243 million of whom the government estimates are eligible for work, based on age and other matters). This waste of human resources is draining society of its vibrancy. And we cannot hang our hopes on marginal changes in the number of low paid service workers amidst such conditions.
This is not just a “blame Europe” story, as the media would sometimes have us believe. It is certainly not a U.S. government debt, interest rate fear, or tax uncertainty story, as the Republican’s in congress would have us believe (after all, one cannot be but stunned by the rates in U.S., U.K. and German long term bonds at rates never seen since The Great Depression). This is a global imbalance/emerging nations integration story and until we start addressing that story directly, the threat of a far more devastating collapse will remain. Come this winter, there may be no Christmas-to-Easter respite.