On the usual macroeconomic metrics the US economy looks to be doing very well; annualised GDP growth was 2.9% for Q3 (although this is the first or advance estimate and so may be subject to some revision) with unemployment at 4.9% and inflation below 2%.
In addition, the budget deficit has shown signs of real improvement since 2008 and the US international trade position is improving rapidly with the current account to GDP reducing steadily and now standing at 2.7% (cf 6% in 2006). In that inelegant modern phrase, ‘what’s not to like?’
Well, we are in the home stretch of the Presidential race with the election being held today and in common with the Brexit referendum in the UK in June, the debate has revealed some deeper, less visible issues which are key to the outcome.
The economy may be doing well, but for many of those in work it doesn’t feel like it.
Real weekly wages have improved in 2015 (to $346) but they’re still not far off levels seen in the early noughties with $341 in Q1 2002. (See here, https://fred.stlouisfed.org/series/LES1252881600Q)
A similar pattern holds with median household income too and the aftermath of 2008 and the lacklustre earnings growth have seen home ownership fall.
The reasons behind the slow real earnings growth are numerous, but the one receiving most attention is the current low productivity in the USA (seen in parts of Europe too), which prevents real wage increases being paid to employees.
The causes of the low productivity are also a concern and the issue is frequently referred to as the ‘productivity puzzle’. At least part of that may be due to subdued investment by firms as lower investment is often correlated with lower productivity.
At the same time the labour force participation rate has really failed to recover to previous heights and is causing some concern - it is unclear as to whether the drop in the rate is a cyclical response, or whether something more structural is taking place.
Technological change is also being held up as a possible cause; with participation much lower amongst those with lower educational attainment employed in routine tasks i.e. those which can be more easily automated.
Against this backdrop, a key issue at the moment is when will interest rates increase? Core inflation is rising and, given the time lag between raising rates and the impact on inflation is about two years, there is pressure for a rate rise now. But the election is clouding the issue and there is strong evidence that this is causing elevated uncertainty which has a real impact on investment and hiring decisions by firms.
The uncertainty is caused in part by the absence (perceived or real) of detailed and well presented economic policies. Some voters who are in work feel they are not seeing improved living standards; those not in work who feel excluded from the labor force are discouraged from even registering as unemployed –with the consequent lower participation rate.
As the University of Michigan found in one of its recent confidence surveys:
In addition to the question on the expected winner, consumers were asked which candidate’s policies would be better for their personal finances and to boost economic growth...................
....Perhaps more significantly, the most common answer was that neither candidate would make much difference. The “no difference” response dominated nearly every income, age and education subgroup for the potential policy impacts on personal finances” (Surveys of Consumers, University of Michigan, Presidential race and consumer sentiment, 21 October 2016)
There is a level of disaffection reflected in the debate and it will need clear, concise and accurate policy statements to reduce uncertainty and provide a platform for businesses, and hence the wider economy, to continue to grow.
To learn more, download Roy’s latest thought-provoking webinar on how the US election will affect the economy