Worst GDP, Wage and Job Growth in 40 Years

Merrill Lynch has obviously been infiltrated by the vast left wing conspiracy that hates America and supports the terrorists.  In a recent presentation, economist David Rosenberg (PDF) slams the current rosy talk about the economy by making the points outlined below.  He also predicts an economic slowdown by the end of the year.

First, Rosenberg notes that real GDP has grown at the slowest pace in this expansion compared to all other expansions since the 1960s.  GDP has grown at an annual rate of 3.1% during this expansion.  This is solid growth.  However, during the 1960s economy grew at 4.5% average annual percentage change; in the early 1970s, the economy grew at 5.2% average annual percentage change; in the late 1970s the economy grew at 4.3% average annual percentage change; in the 1980s the economy grew 3.8% average annual percentage change and in the 1990s the economy grew 3.4% average annual percentage change. So, the miraculous Bush growth is the weakest overall in the last 40 years.

In addition, establishment employment and wage growth for this expansion is terrible.  The average annual percentage change in establishment employment is .6% for this expansion while the average annual wage growth is 1.8%.  Both of these numbers are half the amount of the next weakest rate of expansion for both figures.  In other words - job and wage growth is the weakest in growth by far of any expansion in the last 40 years.

So far we have the weakest rate of GDP, establishment employment and wage growth of any expansion in the last 40 years.

Next, Rosenberg dispels some of the more commonly stated myths of the current economy.

The economy is simply booming

This time last year, that four-quarter moving average [of GDP growth] was 3.7%, and two years ago it was 4.7%.  So it is my contention that when you smooth out the quarterly wiggles, GDP growth is in fact on a moderating path, and in my view, we will be heading towards 2.5% by the end of the year as the lagged effects of the Fed tightening cycle percolate through.

This is a pretty straightforward analysis.  One thing I would add to this is the overall negative impact of a slowing housing market to the overall economy.  Total inventory of homes available for sale has been climbing for the better part of year.  Total mortgage debt is at record levels, indicating the consumer's ability to take on more debt is probably near the end.  Affordability indexes are at 10-15 year lows.  Home construction companies are starting to offer very large incentives to new homebuyers.  A slowing housing market could have a big impact on the economy.  Construction jobs alone are responsible for about 30% of total establishment growth (roughly 600 construction jobs out of roughly 2 million total establishment jobs since January 2001).  This is before we add the total number of realtors, appraisers, and mortgage/finance jobs created during this expansion.

Don't worry about the consumer, the level of household net worth is at a record level.

Well, we went back into the history books and found that US household net worth hit a record level in the quarter before every recession in the post-war era.  Not only that, but in every recession outside of the 2001 episode when the equity market melted, household net worth rose throughout the entire period of negative GDP growth....in other words, the level of net worth is a pretty useless leading economic indicator.

The RWNM econ division has used household net worth as the great statistic of this expansion.  They ignore the fact that this same statistic increased 300% more in the 1990s under Clinton (from 21 trillion to 41 trillion compared to 41 trillion to 51 trillion for this expansion). They use this statistic because, well, they can't use any other statistic as a sign of massive economic strength - as mentioned above, job, wage and GDP growth are the weakest of the last 40 years.  However, Rosenberg places the proverbial wooden stake through the heart of this statistic with this observation - household net worth increases regardless of the overall macro-economic environment.  In addition, the fact that household net worth has increased at a far slower pace during this expansion compared to Clinton's indicates the RWN econ division is clearly not doing their homework.


Wage Inflation is around the corner

.....according to the Bureau of Labor Statistics, there were a total of 4.1 million job postings available in December.  Yet there were well over seven million unemployed people actively looking for work (and another 5 million who would engage in a job search if they though it would lead to success).  So, you can't blindly look at a 4.7% unemployment rate and draw the conclusion that the labor market is tight enough to generate accelerating wage growth when there are as many as 3 potential job seekers out there for every available position.  This still sounds like an excess labor supply backdrop to use, one that is inherently disinflationary.

Starting with the Boston Federal Reserve last spring, the New York Fed last fall and Stephen Roach of Morgan Stanley earlier this year, a large number of economists have questioned the rosy jobs figure the 4.7% unemployment rate presents.  The essential problem with this number (the official unemployment rate) is it does not include people who have not looked for a job in the last 4 weeks.  As the Boston Federal Reserve study points out, a large number of people have left the labor force for a variety of reason.  As a result, the only age group to increase their labor participation rate during this expansion is the 55+ group of males and females.  All other groups have decreased their respective labor participation rates. In other words, there are still a large number of people who would compete for jobs if they became available.  This indicates the possibility of wage growth is lower than the official unemployment rate suggests.

Rosenberg makes two other very important observations.  First, household debt-to-income ratio rose as much in the last five years as it did in the preceding 15 years. This indicates - once again - that debt acquisition is a big reason for this expansions growth.  Secondly, consumer spending on food, energy, interest payments and medical expenses as a share of disposable income rose from 48% to 54% over the last 5 years.  This percentage vacillated between 44% and 48% for the preceding twenty years. This indicates the lack of meaningful wage growth is really starting to hit home with the average American.


So, here we have another economist who is providing solid evidence that the Bush economic miracle is not all it's cracked up to be.  This explains why a majority of Americans have continually stated the current economy is not as great as the numbers would indicate.  Job and wage growth is weak, the rise in total net worth is slower than previous expansion and the rate of debt acquisition is accelerating and necessary expenses are taking a larger bite of paychecks.

Tags: Economy (all tags)


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