Just days before one of the most heated battles for the White House comes to a close, we got amazing news. Not only did the U.S. government report that GDP expanded at a 2.9% pace in the third quarter of 2016, but unemployment dropped under 5%.
In fact, it fell to 4.9% -- down by nearly half since 2009 when the number peaked at 10%.
Unfortunately, the numbers aren’t nearly as impressive as you’d think.
GDP growth came without acceleration in consumer or business demand and the 4.9% unemployment tally doesn't exactly tell the full story.
The 4.9% number is based on the U-3 metric, which only includes the total number of Americans unemployed, as a percent of labor force.
It’s the U-6 that gives us a truer picture of unemployment, because it includes part time employees that would like to work full time and discouraged workers.
(Discouraged workers are people who are not in the labor force, but want to and are available for work, and have looked for a job sometime in the prior 12 months.) That figure currently stands at 9.5%.
The improvement in the unemployment number was realized as the U.S. participation rate dipped from 62.9% to 62.8% -- telling us that another 425,000 Americans left the labor force, which means more than 94.6 million adult Americans are not working.
For comparison 80.38 million Americans were not in the labor force at the end of George W. Bush’s time in office.
The number of jobs added in October 2016 was 161,000, lower than the expected 175,000. In 2016 the monthly average job gain has been 181,000, a steep drop-off from an average of 229,000 jobs each month in 2015.
There was some good news, though.
Hourly earnings jumped by 10 cents to $25.92, following an eight-cent addition in September. For the year, wages have risen 2.8%. That’s not a bad number. In fact, it’s the best since 2009, when the Great Recession ended.
However, there are problems with the wage growth report. According to The Wall Street Journal:
“The 2.8% gain is for all employees. For ‘private-sector production and nonsupervisory employees’ the gain was only 2.5%. On a weekly basis, it the gain for this group was 2.1%. Why does that matter? Well, ‘private-sector production and nonsupervisory employees’ is a group that comprises four-fifths of the entire work force. In other words, a small sliver of the work force saw those larger wage gains. For the vast majority of American workers, wage growth is still anemic, barely outrunning official measures of inflation, which was 1.5% in September, according to the most recent CPI report.”
So what does this mean to the Fed?
Despite the underlying weakness in GDP and unemployment, the Federal Reserve is still threatening to raise rates by December 2016. It’s arguing that the U.S. economy is creating enough new jobs and that inflation could run higher than it is now at an unchanged rate of 1.7%. It can also argue that consumer spending increased by 0.5% in the latest quarter after falling 0.1% in August 2016.
However, according to the CME Group, there is only a 33.2% chance of a 25-50bps hike by December, and a 66.8% chance of a 50-75bps hike.
Given the underlying weakness of the economy, it’s hard to see how the Fed could hike rates.
Whatever may happen, it’s a sure bet that The Cheap Investor will continue to find low-priced quality stocks to recommend to subscribers along the way.