Monthly Note

August 2017

The U.S. and global economy remained strong during August. While U.S. employment and GDP growth showed stable to accelerating growth, there were the now normal caveats of low inflation and slow wage growth. As far as the Federal Reserve and monetary policy are concerned, the Fed is set to announce that its bond portfolio—left over from quantitative easing—will be reduced following the September meeting. Meanwhile, the European economy continued to be a bright spot in the global economy. Germany, France, and even the previously struggling Southern European economies all showed signs of sustainable recoveries. This confirmed that—for the moment—the global economy is in a synchronized, sustainable expansion.

For the U.S., growth remains healthy, but there are noticeable areas of exception. Both wages and inflation are tepid and below the expected levels for this point in a recovery. A recent study from the Federal Reserve Bank of San Francisco explored the reasons for this phenomenon. Their conclusion is not earth shattering. The combination of boomers and people re-entering the labor force is suppressing wage growth considerably—as much as 1.5%. For constantly employed individuals, wages are growing near peak pre-crisis levels. While the drag from re-entrants will subside, the larger headwind from boomers will persist for years. This renders the headline wage growth figures meaningless for some time. Much the same can be said of inflation, but it is more nuanced as rent (higher) and phone plans (lower) are having an outsized effect. Inflation may not send useful signals of the state of the economy either.

The rest of the world is growing as well. Europe is the standout with manufacturing surveys pointing to steady growth across the region. Much like the U.S., the euro area is struggling to stoke inflation pressures. However, the European Central Bank (ECB) does not appear to be in a rush to tighten its monetary policy. While there have been ECB rumors of policy shifts, ECB President Draghi has been tight-lipped about any potential changes. Regardless, asset markets have generally priced in some tightening from the ECB, giving it some room to maneuver either way.

Hurricane Harvey hit Houston at the end of the month, and it will have a substantial effect on economic statistics over the next couple of months. This will render many of the signals generally useless. But it will be interesting to see how the overall data evolves. The Greater Houston area is an economic growth engine for the U.S., and the storm will affect everything from retail and auto sales to housing starts. Looking through the headlines to the underlying data will become far more important in coming months.

The takeaway from August is straightforward: the global economy continues to expand with most countries and regions contributing. Europe is driving the surge, but it is not the only region seeing healthy growth. The U.S. has begun to accelerate, but Hurricane Harvey will affect the growth rate in the immediate term. Despite any slight speed bumps, the U.S. economy appears to be on track to continue its expansion.

Sam Rines

srines@avalonadvisors.com