You would think that, given the press coverage, much of the US economy is making great progress. Apparently interest rates will continue to rise in response to the Fed’s feeling that the economy is doing well; near-full employment, GDP recovery, stock market growth, bond and dollar strength and all that jazz. But these data points mask some other troubling items that suggest any recovery will likely be lopsided and even short-term based. You only have to look under the covers at, say, unemployment, credit, or housing.
- Unemployment: despite low levels of reported unemployment many economists are concerned that the participation rate is at very low levels. In other words, there is a lot of unemployed that is not being reported in the official KPI. Some economists suggest that real effective unemployment maybe nearer 6 or even 9 percent. Thus the result of economic growth may not lead to wage price pressure so soon, since the participation rate may improve the so pick up some of the slack. This is good news overall but not if the Fed believes that they need to head off wage inflation likely to appear due to pressure on a really tight labor market
- Consumer Credit: Student and auto loans are running ahead at full steam, and mortgage debt continues apace. While many firms have cleared their balance sheets of bad debts, consumers – which drive a massive part of the US economy – are amassing debt easier than looking for a hot meal. On February 27th the US print edtion of the Financial Times carried an article, More US car owners behind on loan payments than at any time since 2009. What is realy funky here is that if you go into the market now to look for a new or used car, you will be offered a loan for repayment now past the 5 year window. It used to be that 5 years was the maximum and this was only a few years ago. Now you can get a loan over 6 years or longer. So the consumer part of the market is building up a nice bad-debt situation.
- House prices: Yes, house prices have recovered, so we are told, to near pre-crisis levels. So that part of the market is secure, right? Wrong. Home ownership is a its lowest levels in years. It turns out that the buyers that are driving up prices are investment firms and conglomerates that are snapping up property then leasing them to. So first time buyers are being squeezed out. The housing market has not recovered in the way we would want it or need it to for effective sustainment.
So we have a very lopsided economic recovery. It is not stable and even the strong shoots are some challenging weeds hiding just under the covers. Even if Trump can delivery on +2% GDP growth, I am not altogether sure that woudl mask the issues that are building up today.