Financial Update 7-23

It’s taken a while for the US economy’s recovery to gather pace, but finally it seems to have developed enough momentum to bring a degree of confidence back to the stock and currency markets; the Dow Jones is rising steadily and the US dollar is pulling out of the mire it’s been stuck in for months. The best news of all is the employment figures; in June 288,000 new jobs were created, and in 2014 so far the total is pushing towards 1.5 million. Those figures have been seized on as evidence that the economy’s not just recovering; it’s booming. But is that the case?

Traditionally, job creation at this pace was a sign of high economic growth. Something different is happening this time though. While unemployment fell rapidly in the first quarter of 2014 the economy actually shrank, at a rate that works out to 2.9 percent over a year. That’s been blamed on many things, including bad weather, and no doubt there were a lot of contributing factors, but it still shouldn’t have happened to that extent. Growth resumed in the second quarter but it’s unlikely to do much more than bring the economy back to where it was at the start of the year. Total growth for 2014 could end up being the lowest since the recession.

With more people in work, why is the economy not growing as it should be? That’s a trickier question. Economics can be stripped down to two basic elements – supply and demand. Demand is the main short-term driver of growth; if people want to buy things they will be produced. That means output goes up, workers are hired and sales increase. That’s not really happening right now, though. Households have been cutting back on purchases and trying to clear what they borrowed during the recession and the government has slashed spending. Although interest rates are low the supply of credit is limited. Demand isn’t rising.

So if demand is static why are more workers being taken on? The other side of the economic equation is supply, and that’s ultimately determined by the workforce. With the workforce increasing supply should be rising, and it isn’t. That means productivity is falling, and in the long term that’s not a good sign. Without improved productivity the rate of growth is limited to the rate the workforce grows, and as the baby boomers start to reach social security age and fertility rates decline that’s a low rate – perhaps as low as 0.3 percent a year through to 2030.

The key to boosting productivity is investment – in training and in new technology. Training might be more important in the medium term. May’s figures show that 3.2 percent of all advertised jobs remained unfilled, which indicates that the unemployed lack the skills employers need. An increase in the supply of credit might help employers invest in training but lenders still haven’t regained their confidence after the massive losses of 2008. Right now all we can say is the economy is making progress, but there’s a lot left to be done.