Economic Preview: More Muddling Through

Let’s recap events since we last published in early August and outline what we can expect for the economy now and into 2017. In a word, more:

  • More mixed indicators, as the economy just can’t seem to fire on all cylinders at the same time.
  • More slow growth overall, with GDP continuing to underperform its potential, though likely accelerating over the anemic first-half growth.
  • More heated discussion by economists over what’s holding back productivity and wage growth.
  • More speculation about when the Fed will next hike rates and start normalizing monetary policy.
  • In short, more muddling through.

To start with some positives, the latest forecast from the well-regarded GDPNow model published by the Atlanta Fed, pegs third-quarter GDP growth at a robust 3.5%, compared to growth over the past four quarters averaging just 1.2%. A similar, if less bullish, forecast of 2.7% comes from the Wall Street Journal’s latest survey of economists.

However, both forecasts were released prior to the latest Purchasing Managers Index (PMI) for manufacturers, which fell 3.2% to just 49.4% (indicating modest contraction), and then the services PMI plunged 4.2% to 51.4% (still expanding, but at the slowest rate in the current expansion). These figures suggest GDP growth in line with its recent slow pace. It’s also fair to point out that the GDPNow model has overestimated GDP growth in each of the past three quarters, and at this point in 2Q16 (that is, a month before the end of the quarter), the model was pointing to a growth of about 2.5% (versus the ultimate actual of 1.1%).

What’s the problem? Not consumers, who are the largest and strongest sector of the economy. Last month consumer confidence jumped to its highest level in a year, as short-term expectations for business conditions, employment and personal income all rose. This positive sentiment, along with modest income growth, helped fuel the fourth straight month of consumption gains, even as the savings rate rose.

Meanwhile, payrolls grew by a solid 151,000 jobs in August while the unemployment rate held steady at 4.9% for the third consecutive month. August growth fell a bit short of expectations, but the three-month average stands at a robust 232,000 job gains—all the more impressive for an economy nearing full employment. More disappointing, however, has been the continued weakness in wage growth, as average hourly earnings were up only 2.4%, its smallest gain since March, and barely ahead of inflation.

But that could change. The July “JOLT” report — which tracks job openings and labor turnover and is closely watched by the Fed—reveals a healthy labor market trending toward tight (see chart). The job openings rate (as a share of total employment) hit a record high in July (dark blue line), indicating employers seek to increase their hiring, as well as their difficulty in finding qualified workers. At the same time, the quit rate is near its high for the last decade (light blue line), indicating strong worker confidence that they can find a new and presumably better (or better-paying) job. On the other hand, the “discharge” rate (layoffs and other terminations) is at a record low (red line), meaning employers are reluctant to part with their workers, whether for poor performance or weak business conditions. In sum, the JOLT report suggests that we should expect continued job growth and more upward wage pressure in the coming months.

jolt-chart-2016

Finally, trade is another positive, if surprising, recent indicator. The U.S. trade deficit shrank in July, as exports of goods grew almost 3% while imports fell. The export gain and import drop both represent sharp reversals of recent trends that bode well for GDP growth if sustained—though the sharp drop in the export component of both the manufacturing and services PMIs suggests these gains might be short lived.

So what’s not to like? Chiefly three related items: shrinking business investment, falling corporate profits, and declining worker productivity. Business investment has now fallen for three consecutive quarters, in part due to low wages, which makes adding workers relatively more affordable than adding new machinery and infrastructure, and partly because businesses seem to have less confidence in the future, arguing against making long-term investments in plant and machinery. Also blame the drop in corporate profits, which has fallen year-over-year for five consecutive quarters, reducing funds available for new investment—though to be fair, profits as a share of GDP actually remain at historically high levels, further demonstrating corporate America’s reluctance to invest in the future.

In turn, the drop in investment then helps explain the weak productivity trends. Our economy hasn’t experienced strong productivity growth since the tech bubble burst in 2000, and productivity gains in this expansion have been notably weak. Productivity actually fell in the second quarter as GDP growth was weak and firms continued to add workers. Since productivity is what ultimately fuels economic growth and pays for wage increases, this trend has ominous implications for our long-term economic growth prospects and prosperity unless reversed. I expect to cover this vital topic in greater detail in coming articles, but for now it’s worth asking how much longer firms will continue adding workers if profits and productivity continue to slide.

In summary, economic indicators continue to be mixed, as they have throughout this muted economic expansion. Optimists and pessimists, bulls and bears, and all stripes of political persuasion can find ample data to support their particular temperament. My own view is that we should expect to see more of the same moderate and inconsistent growth in the coming quarters, with the expansion continuing on but also continuing to disappoint. Which is to say, more muddling through. Which also means the Fed will not be raising rates this month, but perhaps in December, after the election. Perhaps.

Finally, as we near our eighth year of moderate growth, it seems increasingly unlikely now that the economy will ever fully take flight in this cycle; we’re in the late stages of this run. The WSJ forecast survey I referenced earlier found that three quarters of economists believe that economic risks over the next year are weighted to the downside while only 18% think there’s much upside potential. That sounds about right.


ANDREW NELSON is the Chief Economist of Colliers International USA. He focuses on developing economic and market perspectives for Colliers and providing strategic advice to clients. In collaboration with the U.S. leadership team, he provides insight, thought leadership and guidance about commercial real estate, capital markets and financial investment. To download other articles by Andrew Nelson visit