U.S. Economy Closing Out ’14 in Good Form
Last week’s strong jobs report continues a trend of solid data that suggests the U.S. economy is closing out 2014 with good form.
The U.S. economy continues to deliver relatively solid results. Just recently, we’ve seen impressive results on employment, purchasing managers indices, and vehicle sales. Notably, last month’s 321,000 jobs added were the most since January 2012. To put this in perspective, the total number of private sector jobs added in the past year is close to 2.66 million. This pace is better than our expectation for this year and is near the peak level of job creation during the last cycle. Looking beyond the headline number, we also see that the index of aggregate hours worked surged 0.6% in the month. The labor force also grew. Versus a year ago, the total U.S. labor force has grown by roughly 1%.
At the same time more people are finding work, productivity growth was revised up to 2.3% for the quarter, and unit labor costs were revised down (both contributing to profit growth without inflation). Over the past year, unit labor costs have grown at an average rate of roughly 1.2%. Putting all of this together implies that the recovery that began in early 2009 continues to make progress. Final demand remains supported by ongoing recovery in jobs, and investment continues to rise as a percent of Gross Domestic Product (GDP) (a sign of gradually improving confidence). The large output gap that exists between what the economy is producing compared to what it is capable of producing remains wide, but has begun to narrow. The overall backdrop for the domestic economy looks reasonably good.
Meanwhile, the current and expected level of inflation remains low. Part of this can be explained by the recent drop in energy prices. Even after stripping out the effect of fuel and food, consumer prices are officially rising below the Federal Reserve’s (the Fed) stated target. So called “core consumer prices” are up about 1.5% in the past year and more recent changes indicate that this trend is not accelerating. An improving economy with little wage or price pressure provides the central bank ample reason to avoid a sharp increase in interest rates.
Low inflation, a sizable but shrinking output gap, steady demand, upwardly sloped yield curve, increasing investment, and generally rising asset prices are all consistent with an economic cycle in mid-swing. This happy state will not last forever, but at least for now, the overall conditions appear generally supportive for growth.