There are many headwinds keeping U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest gross domestic product (GDP) revisions testified to this.
However, while the corridor for U.S. growth is likely to remain lower than in the past, I believe the persistent hand-wringing and skepticism regarding the U.S. economy is grossly overstated, especially when you consider the technology renaissance occurring around us today.
The press has paid a lot of attention lately to how the measurement methods behind many U.S. economic statistics haven’t kept up with the times.
For instance, in a recent New York Times Magazine piece, “The Economy’s Missing Metrics,” Adam Davidson writes about how U.S. economic statistics “are all but useless at measuring the change in general welfare created by new technologies.” Similarly, a July front-page story in The Wall Street Journal covered how official metrics don’t capture the productivity gains coming out of new, free technologies.
I couldn’t agree more, and I don’t just see problems with productivity and consumer price index numbers. As I’ve written before, I believe the U.S. economy is actually much stronger than it gets credit for, and some of this strength is obscured by consumption metrics that haven’t kept pace with the technological revolution we’re witnessing. Here are just two factors missing from the measurements.
Technological disinflation
Consumption numbers don’t capture new technologies’ downward influence on price, and U.S. consumption is likely even stronger than headline figures suggest when you take this into account. For instance, when you strip out the influence of collapsing prices from aggregate nominal personal consumption expenditures (PCE) and just look at volumes, the volume of goods consumed remains solid, meaning U.S. consumption is actually in much better shape than many believe. This was evident in the upward revision of June’s disappointing retail sales and rebounding July retail sales, and implies it’s quite sensible to look past a weak retail sales print (or even a few).
The dramatic shifts in consumption habits occurring today
Technology-savvy millennials are embracing what has come to be called the “sharing economy,” which emphasizes a more asset-light stance toward consumption, with more renting/less owning, and a move away from certain categories of consumption. For example, it’s well-known that many millennials have forgone the experience of purchasing a first car, which would have been a rite of passage for their parents and grandparents, in favor of joining car sharing programs, or simply using transportation services like Uber. The rise of the “sharing economy” is leading to lower prices and more efficient consumption not necessarily reflected in consumption numbers.
In short, the structure of the economy is changing so rapidly that old economic data haven’t kept up. Given this, what economic data should we focus on to get an accurate picture of the U.S. economy?
If you examine measures that are “easy to count,” the picture of the economy’s health becomes much less ambiguous. For example, last April, the Internal Revenue Service saw higher levels of income tax revenue than ever before, and recent auto sales and hotel revenues have been accelerating, suggesting a labor market where income is being earned and spent in an ever more confident manner.
In fact, the long-term strength in the jobs market is also illustrative of broader strength in the economy. In the July employment report, released earlier this month, the 3-month, 6-month, and 12-month moving average payroll gains all came in considerably stronger than the 200,000 average level of jobs growth that has been typical of past periods of economic expansion, according to Bloomberg data.
Beyond the long-term strength in nonfarm payrolls growth, a plethora of other labor market measures similarly confirm the robustness of the jobs markets today. Over time, this strength is likely to result in further wage gains, increasing confidence and greater consumer spending. In the meantime, given that the U.S. economy is already ready for liftoff, we should see an initial rate hike by the Federal Reserve (Fed) before year’s end.
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, Co-head of Americas Fixed Income, and is a regular contributor to The Blog.