US Economic Soft-Landing: Fed Needs to be Correct on Wage Inflation and Productivity
The minutes to the 25-26 July Federal Open Market Committee (FOMC) meeting confirm that members still embrace the Phillips Curve as a framework for guiding policy. Meanwhile, there is healthy debate on the FOMC about how demographic forces are helping to suppress wage inflation, despite low unemployment.
Data released on median weekly wages for continuous full-time employees by the Bureau of Labour Statistics (BLS) indicates that wage inflation is alive and well. Meanwhile, average hourly earnings are being suppressed by newly employed workers finding jobs that pay less than those positions for continually employed workers.
The decline in the US civilian labour force participation rate cannot be simply explained by the ageing of the population and the retirement of the baby boomers. Educational attainment appears to be playing a role, as testified by the large drop in labour participation by those with a mid-tier level of achievement.
Prospective productivity developments will play a crucial role in determining inflation, the neutral federal funds rate and returns on US equities. Vibrant productivity will raise the neutral federal funds rate and corporate earnings growth will outpace equity prices, while slow growth will undermine both profit margins and equity prices.
Critics of the Fed under Chair Yellen claim policy conduct is too dogmatic, thereby raising the risks of an overly-restrictive stance. It is doubtful that the FOMC embraces a strong productivity growth outlook due to lower estimates of long-term economic growth and low wage inflation.
The post-election rally in US equities under President Trump has hitherto been more durable than President Reagan’s honeymoon period due to the persistence of economic growth over a long cycle, something that was absent in 1981. Rising interest rates, courtesy of the Fed, are not automatically disastrous for US equities as long as the economy avoids recession.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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