Wages Will Dominate Big Week for U.S. Data
This week’s heavy load of economic data releases from the U.S. (and, to a lesser extent, China and the euro area) comes at a particularly opportune moment. Views about the prospects for the U.S. economy are all over the map. There also is significant divergence in the assessments of the effects of a probable increase in interest rates this year by the Federal Reserve. And there is an even greater diversity of opinion about whether the U.S. will help pull the rest of the world out of the doldrums or, instead, be dragged down.
Both domestic and global factors contribute to this exceptionally wide range of opinions; and the arguments cut across both time and geography.
In the U.S., economists have yet to agree on the extent to which a continued cyclical recovery can overcome the structural headwinds cited by those worried about secular stagnation. Few, if any, have offered a decisive solution to the wage puzzle reflected in the unusually large gap between strong jobs creation and sluggish earnings. The aggregate measure of productivity trends seems inconsistent with the impact, on the ground, of transformational technologies. Meanwhile, the ultimate effects of sharply weaker oil prices and the notable appreciation of the dollar aren’t fully understood, especially as those two trends are being accompanied by ultra low interest rates.
The global context is even more fluid and difficult to predictable. The areas of geopolitical uncertainty are multiplying, with the recent eruption of a proxy war in Yemen adding to a list that already includes other parts of the Middle East and Russian-Western tensions over Ukraine. The tendency toward repeated stalemate in the standoffs between Greece and the rest of the euro zone hasn’t abated. Both Greece and its partners claim to want the struggling economy to have a strong recovery within the euro zone, but neither displays any urgency to make the required decisions and implement overdue actions.
Meanwhile, the Chinese economy, until recently the engine of global growth, continues to slow, raising questions about its soft landing.
The data releases this week will shed some light on all these questions. And while these monthly snapshots will be far from conclusive, they should help narrow some of the unusually wide differences of opinions.
For example, we are sure to get somewhat of a better handle on the underlying strength of economic growth from the broad-based combination of auto, construction, factory, manufacturing, services and personal income data. Yet as extensive as this coverage is -- and it will be accompanied by notable data releases from China and the euro zone in particular -- the numbers with the greatest impact will be in the U.S. monthly non-farm payroll report, released Friday.
Consensus expectation is for the addition of 250,000 new jobs in March, which would make it the 13th consecutive month of employment creation in excess of 200,000. The consensus is less confident about what the numbers on workers’ earnings will show. Some predict that these are likely to be bolstered by the cumulative impact of diminishing slack in the labor markets. Others hold that sluggish wage growth is now deeply entrenched in the structure of the economy.
The importance of this question cannot be underestimated.
Without steady wage growth, the U.S. economic recovery will falter as weak domestic drivers are overcome by external and structural headwinds. Growth for 2015 would again be in the 2 percent range, and could fall to 1.5 percent or lower. Income and wealth inequalities would worsen further. And the Fed would face enormously difficult policy challenges as it weights the “benefits, costs and risks” of what to do with its zero interest-rate stance. Although this unconventional policy approach has shown limited effectiveness when measured against expectations, and it also carries growing risk of collateral damage, a premature removal could precipitate renewed financial instability that would further erode the economy’s growth dynamics.
In contrast, evidence of a pickup in wage growth would bolster expectations for household consumption, the backbone of the U.S. economy. It would improve the prospects for investments by companies that have the means, but have so far been unwilling. Together, these would push the annual growth rate to the 3 percent zone. It would alleviate, albeit at the outer margin, some of the concerns about the inevitability of further inequality of income, wealth and opportunity. It would help gradually validate asset prices that have decoupled from economic fundamentals. And it would increase the scope for an orderly normalization of the Fed’s monetary policy.
Although the analytics are partial, my gut tells me it is just a matter of time before the U.S. economy’s strong job growth is finally accompanied by more buoyant wage growth, which would alleviate devastating pressures faced by less fortunate segments of society. Hopefully, this week’s data will validate my optimism.
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