United States: Moderate growth to continue, but when will wages begin rising? Global Economic Outlook, Q2 2016
US consumers are carrying the economy in the face of slowing business investment, falling exports, and rising imports. But the strength of the consumer is largely based on a greater number of people working, rather than the increased spending power of individual workers.
Economic growth in 2016 should, in many ways, mirror the growth the United States experienced in 2015, when GDP grew 2.4 percent (that is, of course, unless the current election season moves in a direction that seriously disrupts consumer and business confidence). This similarity will be both in the overall growth rate and in the contribution to growth from the major components, as the three trends that shaped 2015—the low price of oil, the high US dollar, and slower world growth—have persisted into 2016. Overall trends include:
- Consumers should continue to power the economy, based on continued employment growth, low gasoline prices, and cheap imports. In 2015, real personal consumption expenditures contributed 2.1 percentage points to the 2.4 percent total growth.
- The contribution to growth from exports should be minimal in the face of a high dollar and slower world growth, while the drag from imports will continue to be substantial. In 2015, exports only contributed 0.2 percentage points to growth, while the drag from imports was 0.6 percentage points.
- After four years of subtracting from GDP, the contribution from government spending made a small positive contribution (0.1 percentage points) in 2015—a feat that will most likely be repeated in 2016 because of a two-year budget deal struck in late 2015.
- Business and residential investment are two of the components with the best chance of improving in 2016 over their 2015 performance. The contribution to growth from total fixed business investment in 2015 was constrained by the contraction in oil and gas investment. While low oil prices might limit new investment in mining, the United States might be through the worst of the investment pull-back. Housing may also see a pick-up as continued employment growth spurs additional demand.1
If the employee/population ratio continues to trend up, it suggests that employment growth has the potential to continue to drive economic growth.
Although US unemployment, at 5.0 percent,2 is low, there still remains considerable slack in the market, as captured by a variety of measures: The labor force participation rate is lower than it was going into the recession, and the number of people working part time when they want a full-time job remains elevated, as does the number of people who looked for a job in the last 12 months but are no longer looking for work.
Figure 1 shows one of the broadest measures of labor utilization: the employment/population ratio. This measure does not consider whether or not individuals are currently looking for work (the unemployed) or whether they had looked for work in the past but have stopped looking (those not in the labor force). The population in figure 1 is limited to the “prime-age” workforce (those between the ages of 25 and 54) to eliminate much of the impact of young people staying in school longer and the growing retiree population. Currently, this segment of the population is slightly smaller than it was when the recession began because of the overall aging of the US population. If the employee/population ratio continues to trend up, it suggests that employment growth has the potential to continue to drive economic growth. For example, if the employee/population ratio were 80 percent for this demographic as it was prior to the recession, rather than the current 78 percent, this would represent an additional 3.4 million employees in this segment of the population alone.
That so much slack remains in the labor market is often cited as an explanation for the slow growth in wages despite the very strong job growth experienced in 2014 and 2015. The 3.0 million and 2.7 million net new jobs created in each of those years, respectively, were the most new jobs created in a year since 1999. As shown in figure 2, the distribution of job creation among industries in 2014 was similar to that in 2015, although the proportion of new jobs created by the combination of professional and business services, health services, and leisure and hospitality increased as a proportion of total job creation from 45 percent to 56 percent from 2014 to 2015. The large decline in mining employment in 2015, which has persisted into early 2016, has reduced mining employment to where it was five years ago. With only 26,000 new jobs, in 2015, manufacturing employment saw its smallest increase by far since the recovery began—a sign of the toll the high dollar and slower world growth have taken on domestic production. In the prior five years, manufacturing employment had been growing by an average of 164,000 jobs per year.
As shown in table 1, the distribution of wage increases also varied among industries, with the strongest gains accruing to workers in two of the lowest-paying industries. Average wages for workers in leisure and hospitality, which are 57 percent of the private sector average wage, grew 6.1 percent over the two-year period, and wages for retail employees, which are 70 percent of the private sector average wage, grew 5.3 percent. The other industry that experienced fairly substantial wage gains was professional and business services—an industry with higher-than-average wages. At the industry level, workers employed by manufacturing and health care establishments had smaller nominal increases. Underlying shifts in each industry’s average wage are undoubtedly accounted for by shifts in the occupational makeup of each group. For example, some of the slow growth in the average wages of health care workers may be explained by an increase in the number of workers in lower-paid occupations, such as home health care workers, relative to those in more highly paid occupations, such as surgeons.
Table 1. Average wages in selected industries
Percentage change from prior year
Percentage change, 2013 to 2015
|Professional and business services||$28.55||$29.29||$30.09||2.6%||2.7%||5.4%|
|Leisure and hospitality||$13.50||$13.91||$14.32||3.0%||2.9%||6.1%|
Employment gains in the first quarter continue to be relatively strong, and this year should see another strong contribution from employment-driven increases in personal consumption expenditures overall. However, at some point, the US economy will not be able to sustain growth on this basis alone—it will need productivity increases to generate growth as employment growth slows to a rate more reflective of population growth. Over the last two years, overall employment has averaged 1.7 percent growth per year, even as the population aged 16 and over grew by only 1.0 percent per year. Over the same two-year period, labor productivity, measured as output per hour, increased only 0.6 percent, on average. To provide some perspective of how low that rate is, between 1995 and 2003, productivity growth averaged 2.9 percent growth per year. Without an increase in productivity, the growth potential of the US economy will be limited.
The US Federal Reserve continues to exercise extreme caution, keeping rates constant in early 2016, thereby maintaining a highly accommodative monetary policy.
Important avenues for the generation of productivity improvements include investment in research and development (R&D) and business investment in new software and equipment, both of which embody technological improvements. Figure 3 shows the contribution of the components of real fixed business investment to total growth between 2012 and 2015. The intellectual property (IP) component consists primarily of investment in R&D and software. Figure 3 also divides investment in structures into mining and “all other” categories. The contraction in mining was a major contributor to the slowdown in business investment in 2015. Without that drag, business investment would have increased 4.0 percent rather than 2.3 percent—stronger, but still slower than investment growth in 2012 and 2014. Investment in IP has been fairly strong over the period shown, but 2015 did see a reduction in the contribution from equipment investment—not a positive sign for the future in light of the current slow productivity growth.
Of course, there are policy changes that could help improve the United States’ overall productivity potential, including tax reform, immigration reform, infrastructure investments, and trade agreements. However, the odds of anything getting done in Washington in the lead-up to the November election are slim to nonexistent. Fortunately, the US Federal Reserve continues to exercise extreme caution, keeping rates constant in early 2016, thereby maintaining a highly accommodative monetary policy. The best one can hope for is that nothing happens to cause a crisis of consumer and business confidence, but that might be a challenge given the current political environment.