The world’s largest economy brings unsettling news to the most powerful central bank in the world – the cost of labor is growing at the lowest rate in the last three decades, consumer spending is inevitably slowing down, and industrial activity is putting on the brakes. To make matters worse, Puerto Rico, which belongs to the United States, has gone into default.
In the meantime, American politicians, focused on campaign matters, are presenting economic plans that are more fantasy than reality. The news comes at a time when the American Federal Reserve is trying to find the right starting point for normalizing the monetary policy through the first increase of the interest rate in almost a decade. The American Federal Reserve, also known as the Fed, is the United States’ central bank. Low interest rates offered cheap credit during the crisis, thus supporting the economy, but it also led debt to pile up and reduced the profitability of investment, with a direct impact on pension funds.
Moreover, as shown in previous years, increased interest rates mean tough times for emerging economies with high turnover assets and high risk rates. These economies received a part of investors’ money when the Fed started lowering interest rates. Higher interest rates would make American assets attractive again. The Fed has let on that it only will start increasing interest rates when the macroeconomic data convinces them that the economy is strong enough to take it.
Going back to this data, the costs of labor in the U.S. this spring showed the slowest growth in the past three decades, which is proof of persistent slow wage growth. One indication of this is that these costs increased by just 0.2 percent in the second trimester, compared to the first, according to information provided by the U.S. Department of Labor, as reported in The Wall Street Journal. Analysts were expecting three times that much.
Data suggest that the market is still anemic, despite a lower rate of unemployment. According to Stuart Hoffman and Gus Faucher, both PNC Financial Services Group analysts, “At this stage of the business cycle, with significant improvement in the labor market, wage growth should be accelerating.” Furthermore, the analysts say, “Weak wage growth is also somewhat puzzling given recent announcements from big companies, such as Wal-Mart and Target, that they are raising workers’ pay.” Fed officials are closely monitoring price evolution. They believe that acceleration in wage growth will be the right sign that the labor market has indeed improved six years after emerging from recession.
Consumer spending, the basis of American economy, has had the slowest increase in the last four months, and demand for automobiles has gone stagnant. This indicator went up by 0.2 percent each month, after a start of 0.7 percent (modified from 0.9 percent) in May. Consumer spending represents two-thirds of economic activity. In June, spending on goods used for a longer period of time such as cars dropped by 1.3 percent.
Also, the activity in the dry goods industry slowed down, according to Reuters. The index of factory activity, calculated by a suppliers’ association, dropped to 52.7 points in July from 53.5 points in the previous month. Levels higher than 50 indicate growth.
“Not only was economic growth slightly slower over the past few years but the composition of growth has shifted slightly in a less favorable way in regard to near-term growth,” Wells Fargo’s John Silvia, a Wells Fargo analyst, noted.
Whether it’s Hillary Clinton or Donald Trump who wins the presidential election in 2016, either one will bring heavy anti-business baggage to the White House, according to the British publication, The Telegraph. All of the candidates with a chance at occupying the presidential seat are promoting policies that will push back the American economy by a decade or even more. The race for the presidency is being held amidst warning signs that both the U.S. and EU economies are losing their competitive advantages. None of the candidates seems to be paying attention to these warning signs. They are immersed too deeply in campaign rhetoric. Should the situation in the United States become even more complicated, the global economy will also suffer while the world’s governments are too busy working out their own problems and paying too little attention to revitalizing the world economy.
On the right side of the political spectrum, Donald Trump, who is on the Republican side, is leading the pack. He could win 19 percent of the vote. Notorious for his slip-ups and for insulting several categories of the electorate while still managing to be popular, Trump is advancing a ludicrous mix of protectionist measures and economic nationalism more suited for France than for the United States of America. The “Trumponomic” plan implies renegotiating the free trade agreements between the United States and the rest of the world, weakening the dollar to help industry, and restricting immigration. All of this is for the revitalization of middle class white workers, whose “peak” was in the 1950-60s. These kinds of policies could be toxic for the American economy. No developed nation will ever be able to compete with emerging markets for base production.
Things are not looking better on the other side of the political spectrum either. It may be that Bill Clinton had a pro-business administration, but his wife, Hillary, is deviating very far to the left. One of her few real plans includes a complex set of changes regarding capital gains. Investors would pay fewer taxes as long as they own stocks from the right companies at the right time. The rules conveniently ignore the fact that the bureaucrats in the government don’t have the slightest idea about what kind of investments the economy needs. At the end of the day, the tax will actually double for most investors. Bill Clinton reduced this tax.
A sign of a dysfunctional labor market is that unemployment is reduced, but wages are not growing, which discourages consumption.