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Balanced Money | Balanced Life
Ip! Ip! OORAY! Greg Ip, Chief Economics Commentator at The Wall Street Journal, was blogging about business cycles. He wrote, “After a perplexing start to the year, the economy is starting to make sense…[Recently released data] has begun to help solve three puzzles that have hung over the U.S. and global economies in the last year.” The three puzzles were:
1. There was no surge in consumer spending in the United States. Despite a mammoth drop in oil prices, retail sales were weak and contributed relatively little to first-quarter growth. However, May retail sales numbers were strong and numbers for March and April were revised upward. So, consumers appear to be spending. (The final revision to gross domestic product (GDP), which was released in late May, showed GDP grew by 0.2 percent during first quarter.)
2. When workers are in short supply, wages should rise – but they haven’t. Unemployment is at about 5.5 percent. Employers have jobs open and are seeking qualified applicants. Yet, hourly earnings had barely improved at all. The Bureau of Labor Statistics’ Employment Cost Index showed private workers’ compensation grew 2.8 percent for the 12-month period ending March 31, 2015. That was a big improvement over the previous year’s growth. Government workers realized a 2.1 percent increase for the same time period, which was a modest improvement over the previous year.
3. The bond market hadn’t priced in a rate increase. Federal Reserve guidance has been pretty clear. When employment and inflation numbers align, the Fed will begin to tighten monetary conditions by raising the Fed funds rate. Regardless, bond market rates hadn’t moved higher – until recently. Yields on 10-year Treasuries rose from 1.87 percent in early April to about 2.4 percent by mid-June.
Ip summarized, “…in many ways, the world is behaving as it should. If so, then the next stage is for stock and bond investors to finally realize the era of zero rates is coming to an end and re-price accordingly. Do not expect that to be a smooth process… That the world is behaving normally, however, is not the same as saying it’s back to normal.”
Think About It
“Change is the law of life. And those who look only to the past or present are certain to miss the future.
--John F. Kennedy, 35th President of the United States