Headline data about the U.S. economy hasn’t been great, but the economy is actually stronger than it’s getting credit for. The Federal Reserve (Fed) seems to agree. Citing a pickup in conditions after a winter stall, the Fed said in its June meeting the economy is almost ready for gradually higher interest rates.
A superficial analysis of much recent economic data shows a “soft economy,” but if you look past the aggregate nominal numbers, you get a very different and more accurate picture of the U.S. economy. Indeed, you get some good news: The U.S. economy is doing quite well.
Case in point: consumption data. The weakness in first-quarter consumption garnered much attention. Aggregate nominal personal consumption expenditures (PCE), as measured by the 3-month annualized rate, witnessed a tremendous decline in the first quarter.
But when we disaggregate the data, we find that price led to much of that weakness, while volumes remained solid. In other words, when you strip out the influence of the collapse in oil prices and the dynamic of new technologies’ downward influence on price, goods consumption is actually doing extremely well.
Further, services spending appears on a strong and improving path, and many services are just priced more efficiently than in the past. Indeed, the year-over-year growth rate in real services PCE, as the figure below shows, is near 2.5 percent, which is a fairly healthy level.
Meanwhile, other numbers, and anecdotal evidence, confirm this view of consumption. Housing starts are moving dramatically higher, iPhones are hitting record sales, the lines remain long at Starbucks and most importantly, people are being hired in record numbers to satiate the consumer demand, as we see in May’s jobs report, which exceeded the consensus of economic forecasts, and the long-term employment picture.
While technological changes have eliminated thousands of jobs, cyclical industries are still creating hundreds of thousands of jobs. For instance, the retail sector has added 24,000 jobs/month in the past two years, while the 13 years prior saw an average loss of 1,000 jobs/month, a fascinating reversal of fortune for retail employment.
To be sure, there are long-term trends holding down U.S. economic growth, including the demographic shift toward an older population. In addition, as my colleague Russ Koesterich recently pointed out, there are reasons why consumers aren’t spending as much as they could be, including high debt levels and a historically low savings rate.
However, what’s clear is that the U.S. economy is doing pretty good in the context of slower overall growth potential. In fact, this new normal is actually a whole lot better than a cursory analysis would have you believe, and is far from an “emergency” situation warranting emergency-level monetary stimulus.
Sources: Bureau of Economic Analysis, Bloomberg, BlackRock research
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, is Co-head of Americas Fixed Income, and is a regular contributor to The Blog.