WASHINGTON – Steady hiring is supposed to fire up economic growth.
Cheap gasoline is supposed to power consumer spending.
Falling unemployment is supposed to boost wages.
Low mortgage rates are supposed to spur home buying.
America’s economic might is supposed to benefit its workers.
Yet all those common assumptions about how an economy thrives appear to have broken down during the first three months of 2015.
The economic benefits that normally would flow after a full year of solid hiring have yet to emerge. Just 126,000 jobs were added in March, the government said Friday. Average weekly paychecks fell.
Restaurants cut back on hiring because savings at the gas pump didn’t lead to more dinner reservations. Builders and manufacturers each cut 1,000 workers from payrolls, thanks to tepid construction activity and so-so factory orders.
Had Friday’s report been released a few days earlier, “it would have been laughed at as a great April Fools’ joke,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics.
The middling gains confirm evidence elsewhere of a broad economic slowdown. During the first three months of the year, the Atlanta Federal Reserve forecasts that the economy actually came to a standstill — failing to grow at all.
Some of the first quarter’s slowdown is no doubt due to an especially harsh winter. Yet nearly six years into the recovery from the Great Recession, the economy’s muddled progress seems inescapable. A long-awaited breakout remains elusive, suggesting that the economy’s direction has never been quite as simple as some analysts, politicians and bar stool philosophers would have it.
Now, some analysts are pointing to factors that might have been downplayed or overlooked this year. Others are holding to their projections about the economy as it theoretically should be. After all, they reason, March may prove to be a hiccup akin to what happened in 2014, when a first-quarter slump was followed by a burst of growth in the ensuing months.
Here are five factors that help explain why the U.S. economy isn’t accelerating as you might expect.
— NASTY WEATHER
For parts of the United States, it felt like endless winter. The snowfall and frigid temperatures that lingered until the closing days of March can freeze economic growth.
Construction crews built fewer homes: On a seasonally adjusted basis, builders broke ground on 17 per cent fewer homes between January and February. Shoppers skipped visits to the mall and auto dealers, choosing instead to crank up the thermostat. Retail sales fell in January and February.
“Losses to construction and some moderation in retail hiring relative to last year suggest unusually harsh winter weather played some role in explaining the weakness,” said Diane Swonk, chief economist at Mesirow Financial.
If weather was a culprit, it might actually be an encouraging fact. It would mean that the economy remains fundamentally healthy — something that would become evident once the clouds lift and the sun emerges in spring.
And that would be exactly what occurred last year.
Still, Swonk cautions that weather explains “some but not all” of the disappointing growth.
— STRONG DOLLAR
Many U.S. factories ship their wares around the world. But because the U.S. economy has fared better than its trade partners, U.S. factories are now at a disadvantage: America’s relative health has helped drive up the dollar’s international value. Goods from U.S. factories are about 20 per cent costlier in Europe than a year ago, an increase that has dampened sales.
So the U.S. economy’s very strength has helped create a weakness.
Which is why Maryland-based Marlin Steel has held off on plans to hire more metal workers.
“It’s not just me selling into Europe — it’s all of my clients selling into Europe,” said Drew Greenblatt, president of Marlin Steel. “They’re all dealing with the pain.”
— OIL’S SLICK MOVES
A barrel of crude oil costs under $50, having more than halved in price since June. This means wells are pumping out smaller profits, if not losses. When oil prices plunge and billions of dollars are at stake, oil companies tend to respond quickly to curb production. The number of active rigs has fallen 50 per cent since October, according to Baker Hughes, the oilfield services company. This has led to layoffs, tighter budgets and fewer orders for equipment, all which hurt growth.
Consumers, by contrast, have yet to respond to their savings from cheaper gasoline by spending much more. The lag means that the oil companies’ cutbacks have yet to be offset by greater retail spending. So the economy has suffered all the downside, while the upside has yet to appear, said Carl Tannenbaum, chief economist at Northern Trust.
Tannenbaum predicts that consumers will eventually respond to gas prices, which are on average 33 per cent lower than a year ago. When they finally do, the economy should perk up.
— MEAGER PAY RAISES
It’s hard for consumers to spend more if their paychecks barely move. Average annual wage growth is stuck at a meagre 2.1 per cent even as the U.S. unemployment rate has tumbled over the past year to a near-normal 5.5 per cent from 6.6 per cent. And average hours worked declined last month, causing workers to earn even less than they did in February.
In theory, the hiring surge that occurred over the past year should lead to higher wages. After all, when the unemployment rate falls, it usually becomes harder for companies to hire capable workers, forcing them to offer better pay. But despite recent raises at McDonald’s, Wal-Mart and other companies with lower-paid workers, there’s little evidence that pay growth is accelerating.
It might be that the unemployment rate needs to fall even further. The Federal Reserve now says a normal economy should have a rate as low as 5 per cent.
But another possibility is that a sizable pool of workers remains available around the world, providing cheap labour that suppresses wage growth in the United States. In recent years, the global labour pool has added more than 3.5 billion working-age people from emerging economies. This increase can suppress U.S. pay growth, said Megan Greene, chief economist at John Hancock Asset Management.
“If you have that many jobs globally, it’s hard to see why wages would be pushed up in a sustainable way,” she said.
Consider the housing market. Since home prices bottomed in 2012, they’ve surged at a 13-1 ratio compared with raises, according to an analysis by RealtyTrac, a real estate information company. Without rising incomes to save for a down payment and cover monthly mortgage payments, most people who hope to own a home can’t take advantage of historically low mortgage rates. This has led to sales running below last year’s pace, according to the National Association of Realtors.
— GOING AUTOMATIC
The U.S. economy is undergoing seismic technological shifts. And many employers are finding automation preferable to hiring. A survey of Harvard Business School alumni released in September found that nearly half would rather invest in technology than hire or retain workers. This displacement can undermine the usual connection between falling unemployment and rising wages.
Even smaller employers are turning to tech. Recent job ads failed to produce enough qualified applicants at Massachusetts-based retailer Dave’s Soda and Pet City, which sells soda and pet food at seven locations. Founder Dave Ratner said his 150 employees earn on average $15 an hour. Raising pay would make him less competitive with national chains. So Ratner chose instead to automate his stores’ ordering system.
“We’re spending a ton of money trying to automate everything we do,” he said. “Anywhere we can cut down on the amount of labour without sacrificing customer service. …We’ve just never done that before. But it’s really a necessity.”