Clearly markets have been in flux. We
saw some pretty dramatic sell offs in
the stock market the end of 2018.
This Christmas Eve the stock market
delivering investors a lump of coal.
Credit spreads widened out. The yield
curve was flattening - the 10 year
yield in particular coming down. All of
those things were signals of concern
about the health of the economy and
where we are in the business cycle.
That said the actual economic data have
held in pretty well. We had a
spectacular jobs report for the month
of December. 312,000 jobs created with people
coming back into the labor force. We've
seen consumer spending holding in
pretty well with a robust holiday
shopping season. So to us, what's
happening with the markets are telling
are that the risks are greater the
downside risks are clearly larger right
now and a lot of those risks are
stemming from abroad rather than
something that's happening in the
domestic economy. So in particular,
growth abroad has slowed. We're seeing
a significantly weaker backdrop in
China. So I think there is a lot of
concern about the health of the economy
in China. Part of that is because
growth naturally has been slowing for
the past few years. But now on top of
that we are seeing this trade war build
between the US and China and those
increase in tariffs reportedly have
started to play a role in Chinese
economic performance.
So part of the reason that U.S. equities
performed poorly at the end of 2018 was
because of concern from what they were
seeing in China. The Chinese equity
market had a very difficult year in
2018 so that all bleeds into the
broader state of the financial market.
The challenge with identifying risk is
that it's very hard to know in real
time which factor is going to end up
being what shocks the economy. So we
can attempt to look at the the
potential areas of concern in China
would be certainly one of them. And
it's not just China how that spills
over to Europe, the debt in Europe has
has weakened. So there's lots of
connection there as well. So you could
certainly make the case that there's a
lot of areas where things look a bit
unsettled. And then even here in the US
there's concern over policy paralysis
or even worse gridlock that leads to a
negative confidence shock in the
economy and we're potentially starting
to see some of that play out in
confidence measures. Our baseline
forecasts for growth in 2019 is a
moderation from 2018. So 2018 we had
nearly 3 percent growth a normal pace
of growth this business cycle is a low
2 percent handle and that's what we
think we're going to see this year. But
a growth moderation does not
necessarily equal a growth contraction
or a recession.
The risks are higher certainly than they
were this time last year but we're not
seeing the typical signs that we would
see in early stages of recession. So if
the economy was truly entering a
recession we'd be seeing signs of
initial jobless claims picking up for
example. So evidence that firing was
actually starting to edge up that
companies were looking to shrink their
labor force. That's not at all clear in
the data. If you think about how a
business cycle normally turns there is
an imbalance. There's over capacity. We
don't have that in this environment.
There are certain areas where maybe
there's slight excesses but not to the
point where we should see a real turn
that would impair overall economic
growth. So uncertainty is high. There's
reasons for concern particularly
stemming from the global economy.
But if you look at the core of the U.S.
economy things are still looking quite okay.
So if you dissect the labor force
numbers, in particular the labor force
participation rate, what you will see
is that the prime working age cohort
those that are aged between 25 and 54
have been increasing their
participation for the past several
years. The challenges is that the
demographic forces on balance have been
providing an offset which means we've
an aging population. So in aggregate
our participation rate is going to
suffer in that environment. One way to
separate is look at the men versus the
women amongst the prime working age
population. And what's fascinating is
that women have returned back to pre
crisis levels. In fact their
participation rate is above where we
were during the last recovery. But
prime working age men haven't yet fully
come back. And it's not obvious why it
could be a matter of time. It could be
that jobs need to be made available in
certain sectors that will help entice
men of that age group to come back in.
An important factor I think in terms of
potentially helping to drive labor
supply higher in the coming year is if
wages can continue to rise. We are now
seeing the majority of the major
sectors in the economy see wage growth
in excess of 3 percent. So the highest
earners the wages that are increasing
the most are in this sector called
information. Which is tech that's going
to be a highly skilled part of the
economy. Wage growth is increasing very
rapidly there. But you're seeing it now
also in construction, you're seeing in
leisure hospitality, retail trade,
utilities and those are categories that
are going to be impacted more from that
global economy. So the fact that you
still have more subdued wage growth
abroad that feeds back into the goods
oriented part of our economy.
So over the past several years we've
seen a widening of income and wealth
inequality it's not just in the US it's
a global phenomenon. I think part of
that probably was a function of central
bank policy. So with central bankers
engaging in monetary accommodation
which means bringing interest rates
down inflating asset prices that helped
to create a divide on the wealth side
because a large share of financial
wealth is concentrated in that top tier
of the income population. So part of
that probably is a consequence of the
extraordinary action. But it's an
unintended consequence clearly. But
what do you think about what income
inequality or wealth inequality means
for the broader economy. It does
suggest a softer trajectory for
consumer spending on balance because
the propensity to spend out of income,
the lower income group tends to be a
lot higher than that amongst the upper
income group. So the more that income
is concentrated in the very top tier of
the population the lower the trend will
be for overall consumer spending.
I think the increase in wages is to be
expected given that the unemployment
rate is at such low levels. So the
labor market is tight and when you have
a tight labor market and you have labor
shortages do tend to see wages
increase. And you could make the case
that some of the gains might be for
minimum wage increases particularly in
the leisure and hospitality sector or
the retail sector where you have a
greater proportion of that population
on minimum wage. And certainly the tax
cuts that we see in 2018 helped to spur
economic growth that increase the
demand for labor. So in theory that
could be contributing as well.
But really I think it's just a function
of this business cycle with a low
unemployment rate. We have tightness in
labor market and in turn wages are picking up.