The nation has entered its 11th year of economic expansion, setting a record for duration. After two years of robust growth, the economy is slowing, but not as much as expected. The latest employment figures from the federal Bureau of Labor Statistics showed a surprisingly strong job market in June and that the economy still has room to grow.
Although this is good news, it discouraged investors betting that the Federal Reserve will cut interest rates significantly this summer. Still, the stock market remains near record highs, and the strong employment news suggests that the Fed can afford to delay any major policy change until it sees clearer signs of a downturn, giving hope that the expansion can be further extended.
Recent comments by Fed officials suggest they are mostly concerned that the U.S.-China tariff war and Chinese economic stagnation will slow economic growth. A lot thus depends on the kind of deal President Donald Trump can reach with the Chinese government. It was encouraging that the two sides agreed to resume negotiations.
There are a lot of positives in the new economic data. Nonfarm payrolls increased by 224,000 jobs in June, well above the predicted gain and a strong recovery from disappointing figures in May. Even so, the jobless rate rose slightly, a sign that more Americans are entering the labor force to look for a job. The labor-force participation rate rose slightly, although it is still well below record highs reached around 2000. That suggests the economy still has room to grow.
A pleasant surprise was the finding that manufacturing jobs increased by 17,000. Investment in plant and equipment has slowed this year, but the data suggests that demand for goods remains strong.
The biggest employment gains were in health care, professional services and construction.
In the past two years, wages have risen faster than at any time since 2012. This trend continues in the new data at a rate slightly below the peak reached earlier this year, but still above 3 percent while inflation remains below 2 percent. The gains are modest but steady, and the tightening labor market suggests that employers will have to raise wages further to fill positions.
One encouraging trend in the price data for the past two years has been a significant slowing of inflation for medical services, a trend that will benefit employers, employees and the federal budget. But for employees any relief on health care costs has been more than offset in recent years by housing costs rising much faster than the overall cost of living.
The economy is healthy at midsummer, but it is far from perfect. The declining labor share of national income, a trend that has been underway since the 1970s, shows no signs of a rebound. The distribution of incomes still disproportionately favors those who earn a living from financial transactions over those who provide their labor.
And reckless financial bets still have the power to trigger a new recession. Concern increasingly focuses on leveraged business loans, a market double the size it was in 2008 when the collapse of leveraged housing loans brought on the Great Recession. The Financial Times reports that regulators are growing concerned about deteriorating lending standards and the emergence of “covenant-lite” loans that allow companies borrowing money to mask their real financial conditions. The investment group Pimco estimates that the next economic downturn will produce a default rate up to 50 percent higher than in the 2000 and 2008 recessions with losses as high as 50 cents on the dollar.
It is fair economic weather now, but the Fed better be prepared for the next financial storm.