The continued expansion in the US

Despite my concern over releveraging and increased household debt in the face of low wage growth, I believe the cyclical recovery in the US will remain intact for some time to come. The latest jobless claims numbers give a further boost to the economy.

I am going to keep this note short since I am away on holiday this week. But I wanted to make a brief comment on the jobless claims numbers that came out of the US this morning. I see jobless claims as one of the best real time indicators of economic momentum in the US because this data series is very real-time and large swings down or up have consistently been coincident with peaks and troughs in economic cycles.

The latest data show seasonally-adjusted initial claims decreasing to 312,000, bringing the 4-week average down to 311,750. This is a very low level, consistent with a decline in unemployment and relatively large gains in non-farm payrolls. Moreover, with fewer people filing for claims, we should expect household income growth to remain robust enough to power continued recovery, even if some of that recovery is predicated on releveraging.

I think this is where the cyclical versus secular trends diverge and what makes understanding that divergence important. Policy makers have consistently shown that they are most concerned with cyclical trends in economic growth, employment, and inflation. Before the Great Financial Crisis, there was almost no concern amongst policy makers about secular issues regarding debt, leverage, and wages, which have proven to be the most potent forces in retarding growth. 

What this means is that we can enjoy cyclical growth that increases financial fragility and erodes the sustainability of economic growth from a secular perspective. Cyclical growth predicated on releveraging and debt accumulation increases the potential for debt stress at cyclical troughs when the credit cycle turns down. Whereas growth that emanates from wage and income growth gives consumers space to consume more without restricting their capacity to borrow.

This economic cycle will continue upward. But I believe the trend toward releveraging, particularly in subprime auto and student loans will be debilitating for growth when the credit cycle turns down. Using looser monetary policy to help generate wage growth is a dangerous game because it has unleashed quite a deal of froth while wage gains remain absent.

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