Strong jobs report points to continued strong economic growth in 2019
WASHINGTON: According to the Labor Department, the US economy added a whopping 312,000 jobs in December. The good news is that’s roughly twice what experts had forecasted. In addition, the unemployment rate increased from 3.7% to 3.9%. That too is good news.
In total, the US economy added more than 2.6 million jobs in 2018, which is the best showing since 2015. The labor force participation rate increased to 63.1%, which explains why the economy added so many new jobs, yet the unemployment rate increased. More than 600,000 discouraged workers re-entered the job market.
While the 63.1% figure is almost one full percentage point above the low reached in 2015, it is still far below the 67% rate prior to the great recession.
However, as the economy expands further, new opportunities will encourage more discouraged workers to re-enter the job market.
The better news is that in the past 12 months, wages grew at 3.2%, far exceeded the inflation rate meaning workers got real wage increases. Even the Federal Reserve (FED) does not seem concerned with this large wage increase. Normally the FED would worry about wage pressure increasing per unit labor cost which would be inflationary.
However, productivity increased at a 2.2% rate which means a 3.2% wage increase will add only 1% to labor cost.
How about the stock market?
Over the past month or so stock prices have fallen by about 20%. Many economists believe this is a sign that the economy will slow considerably next year, perhaps even enter a recession. That assessment is probably not correct.
Analysts would say that the price an investor is willing to pay for a share of stock is determined by that investor’s expectation of future corporate profit. Since stock prices have fallen dramatically isn’t that an indication that investors believe the economy will slow next year which will reduce corporate profit?
That may be true but investors have been wrong in the past. In fact in only four of the last seven market corrections was the economy in, or about to enter, a recession. The other 3 out of 7 the market was wrong. The market is wrong this time too.
Consumer confidence, although dipping last month, is still near record highs. Business investment which slowed in the third quarter of this year was up almost 10% in the first half of 2018. Strong business investment and high consumer confidence generally point to a growing economy.
The stock market has reacted to uncertainty and not the fundamental strength of corporate profits which were about 20% higher in 2018 than in 2017. The uncertainty comes from two things: international trade and politics.
The Democrats have taken control of the House of Representatives.
Democrats economic platform calls for a continuation of Obama era policies which concentrated on “curing perceived social injustices” rather than concentrating on economic growth. The Dems believe it is an injustice that all Americans do not have health care.
They further believe it is an injustice that CEO’s earn so much more than the average worker. Or that big business and big banks take advantage of consumers. It is an injustice that the minimum wage is so low. It is an injustice that there is not more food stamps and welfare available to Americans.
Each time the prior Democratic administration acted on these perceived injustices, economic growth was hindered. g Growth averaged only about 2% from 2008 to 2016. In 2017, with the GOP controlling both houses of Congress and the presidency growth was 2.9%.
2018 Economic Growth growth will be about 3.3%.
Will the Dems, now in control of the House of Representatives move to take actions that slow economic growth? That’s what has investors worried.
Then there is the uncertainty about foreign trade.
President Trump wants to renegotiate every one of the trade deals the US has. That’s because every deal is lopsided in favor of our trading partners and to the detriment of the US. For instance, the US charges China and the European Union (EU) a 2 ½% tariff on cars imported into the US. The EU charges US manufacturers a 10% tariff. China charges 25%.
Trump wanted to bring our trading partners to the table to renegotiate those deals. Obviously, since the current agreements are all in their favor, they were in no hurry to do so. Businessperson Trump wanted to create a sense of urgency by slapping on tariffs. It is working, as all trading partners have either reached new deals or are at least at the bargaining table to renegotiate. The result will be that foreign markets will finally, fairly be open to US manufacturers.
This points to continued growth in the US economy. While the consensus view is that growth will slow to about 2.5% annually, the data really points to a different conclusion. GDP will likely grow by at least 3.5% in 2019, as long as the Dems don’t try to raise taxes, increase Economic Growth stifling regulations and increase the size of government.
Let’s hope all of our elected officials place economic growth as the top priority.