Economy May Be Improving But It's Still Not Healthy

Having been forced to endure endless press stories about how Trump voters are sticking with him despite the fact that the President's approval rating fell from the mid-to-low 40s to the mid-to-low 30s and his disapproval numbers shot into the 60s over the last year, it appears the this year's mandatory story is the booming US economy and labor market shortages that are driving up wages.

I'm guessing that part of this media meme was driven by the GOP tax bill and the accompanying (bogus) claims that companies were increasing investments, raising wages, and offering bonuses in the wake of its passage. Most of those claims were simply companies re-announcing decisions made many months prior and had nothing to do with the passage of the tax bill other than buttering up Trump.

The typical example of this story is a NY Times article the other day about a tight labor market forcing companies to actually hire workers who have had prison records, or have been on disability, or have been part of the long-term unemployed. Things have gotten so tight in Wisconsin that companies are actually hiring prison inmates. According to the Times, "demand for workers has grown so intense that manufacturers are taking their recruiting a step further: hiring inmates at full wages to work in factories even while they serve their prison sentences." A further example of this kind of reporting is the graph that is made the rounds yesterday showing the spike in both men and women returning from disability to join the work force.

While a falling unemployment rate and unemployed workers returning to the labor force is assuredly a good thing, the accompanying benefits that are supposed to come with that change are simply not happening. As the Times article admits, "The tight job market hasn’t yet translated into strong wage growth for American workers." As Kevin Drum points out in the chart below, inflation adjusted wage growth has actually fallen over the last two years.

Yes, wages were up 2.5% over the course of 2017 but inflation finally began to creep up as well. In addition, the anecdotal evidence that companies are hiring at a furious pace is also belied by the jobs data. The December employment report was deciding middling with only 148,000 new jobs created. This is a continuation of declining employment growth since a peak in 2014. The current employment population ratio (EPOP) may be increasing but it is far below levels we saw before the last recession.

As Ernie Tedeschi notes, "Prime-Age EPOP has fully recovered from its immediate pre-crisis average in New England, but a cluster of regions are still about 1pp below, while another cluster (E S Central, Mountain, and South Atlantic) are around 2pp below." Now part of that is demographic as boomers age out of the work force. But it also reflects the fact that many areas of the country still have not recovered from the Great Recession.

Over the last week, Trump has been touting the reduction in black unemployment, saying it is the "the lowest ever recorded in our country", which is (surprisingly) factually true. Again, the reduction in unemployment is worth celebrating, but it would be even more helpful if that actually translated into higher wages. As Drum again points out, median household income for blacks has still not returned to its height in 2000 and is still well below the 1975 median. That's 40 years with not only no progress but an actual regression.

This has been the longest recovery in the post-war period. It has also been one of the weakest. Currently, the stock market's price/earnings ratio is near record highs which is usually an indicator of a looming downturn. Inflation has begun to creep up and oil prices are rising and, in response, the Fed has already begun the process of slowly raising interest rates off historic lows. Offsetting these warning signals is the fact that all the world's major economies are now growing together for the first time in over a decade. And the GOP tax bill may be able to juice the economy for a little while more. In addition, recoveries from financial recessions such as the one in 2008 may last a bit longer than normal simply because the damage done is usually far greater.

But if the inevitable downturn comes sooner rather than later, it will be yet another so-called economic "recovery" where many areas of the country will still not have seen employment fully recover or any real wage gains. So, yes, there will be many stories over the next year about how the economy is improving, which is no doubt the case in some regions. But the real story is that most American workers are still far worse off than they were over a decade ago.