3 Things American Workers Can Expect in the Next Year

This is the first draft of a piece I am writing for another website. As I am writing it exclusively for that site, let me put this behind the paywall for your consumption here at Credit Writedowns Pro only. The gist of the piece here is that, while I see a cyclical recovery that is gathering pace, the Achilles heel of the recovery from a sustainability perspective is wage growth. To the degree the Fed normalizes policy now before wage growth has a chance to make up for its really weak post-recession trajectory, the US will find itself in the same sort of weak stall speed scenario that we now see in Europe. My worry now is that the cyclical recovery has been artificial, fake – goosed up by temporary monetary stimulus. I think that when that stimulus is removed, there will be nothing to support continued growth, and that the US economy will weaken. Here’s how I put it below.

A colleague of mine who doesn’t follow economic and financial news asked me a couple of weeks ago to tell her what was going on in the U.S. economy. I had been writing some pretty upbeat things in my newsletter about jobless claims and the unemployment rate going down and about more jobs being created in America. And so I wanted to give her a feel good story about how America’s recovery was gathering pace. But when it came time to talk, I couldn’t. See, I knew that all of the recent positive economic data masked an underlying weakness in our economy — a weakness that poll after poll has shown many Americans sense today, five years after a statistical recovery began in 2009. 

When I go through my own recent bookmarks tagged poll, I get headlines like, “ U.S. Consumer Spending Flat in August”, “America’s Fed Up: Obama Approval Rating Hits All-Time Low, Poll Shows”, “ Student Debt Linked to Worse Health and Less Wealth”, and “Americans Losing Confidence in All Branches of U.S. Gov’t”. So, while consumer sentiment might be rising, people are deeply skeptical of this so-called recovery even as the Federal Reserve is talking about raising interest rates and ‘normalizing policy.’ 

Let me be honest here; we are nowhere near the point where the economy can support rate hikes. The Congressional Budget Office is forecasting a measly 1.5% growth for the U.S. economy in 2014. Yes, the US is in a full-blown cyclical recovery now. But the recovery is one that has been muted because of lingering effects from the financial crisis and zero wage wage growth for middle class Americans. Did you know, for instance, that this recovery has been the weakest in terms of wage growth of all post-war US recoveries?

(source: Bloomberg)

You don’t get a robust economy with that kind of wage growth. What’s more, all of the gains have been going to the top 20%. According to Bureau of Labor Statistics, the households in the top 20% saw income grow $8,358 per year from 2008 to 2012, while the households in the bottom 20% actually saw income decline $275 per year. So, technical recovery or not, it’s hard to be 100% optimistic when we see these kinds of figures.

But still, let me put this out there. Here are three things American workers can expect in the next year.

First, the labor market is tightening and we should expect that trend to continue. Unemployment is now at 6.2%, down from a 26-year high in late 2009. Job openings recently hit a 13-year high of 4.7 million. The number of workers hired inched up to 4.8 million, while 2.53 million felt comfortable enough with their employment options to quit in June, the highest level in 6 years. And jobless claims are averaging a tad under 300,000, about the lowest level since the halcyon days of the housing bubble. This is all good and will eventually lead to wage growth.

Second, the Federal Reserve will continue to tighten policy unless we get an abrupt downshift in the economy. Now, remember, economic policy in the US has been geared toward the wealthy. It’s been about tightening fiscal policy and loosening monetary policy to drive recovery.  The focus on tightening fiscal policy to reduce the deficit effectively means lower net fiscal transfers to the private sector and less money in people’s pockets while the loosening of monetary policy via zero rates and asset purchases means a reduction in discount rates and increased risk appetite, both of which boost asset prices. That’s where the dichotomy between the top 20% of households and the bottom 20% comes from. But if one listens to Fed officials, it’s clear this policy tilt is coming to an end. Instead we will have tighter fiscal policy and tighter monetary policy too. This is going to pt pressure on asset prices and could temper wage gains that would otherwise come.

Third, banks will tighten lending standards as rate hikes and signs of poor lending hit the bottom line. As an example, in the past couple of years, demand for cars was buoyed artificially by looser credit as banks originated loans to package up into auto asset backed securities as they did during the housing bubble with mortgage loans and mortgage backed-securities. And just as we saw with housing last cycle, lenders are sub-priming the market, preying on lower credit buyers and putting them into higher rate loans worth more than the price of the vehicle. The New York Times did a must-read exposé on this market. What they found was fraud — like what we saw in mortgages during the housing bubble. So, this is a disaster waiting to happen. And I believe it will happen when the Fed hikes rates because signs that auto demand is slowing and that delinquencies are rising have just started to accumulate.

Now, put these things together and you have a cyclical recovery based on low-interest rates instead of wage gains that will likely weaken due to tighter monetary policy and higher interest rates. Fewer people will buy houses, buy cars and buy consumer goods. And consequently, I fear that the opportunity for wage gains to kick in will diminish just as the ‘real’ recovery is beginning.