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An "Under the Radar" Economic Recovery

Much has changed since the financial crisis of 2008, and the U.S. economy has come a long way. While some key economic measures have been volatile and inconsistent, many have been improving quietly since the recession, leading to an “under the radar” economic recovery. In some circles there is still a sense that the recovery has been a bit disappointing and not as robust as it could have been. A closer look at some key economic measures shows us that clear progress has been made.

Keep in mind that the economy and the stock market aren’t necessarily tied together, especially in the short run. History has demonstrated extended periods where stocks are falling at the same time that the economy is improving and vice versa. While we still could see increased volatility in stocks, indicators point to the economy’s continued gradual recovery which is important for businesses, workers, and long-term investors.

Economic Growth

Gross Domestic Product (GDP) is the market value of all goods and services produced by a country (essentially a measurement of the size of an economy). The growth in U.S. Real GDP, which removes the effects of inflation, has moved along modestly, averaging just over 2% following the recession (see Figure 1). This is below the 3.1% average growth rate for the 20 years prior to 2008 but is considered by many economists to be a more reasonable expectation going forward due to lower population growth.

Inflation

The Consumer Price Index (CPI) measures the variation in prices paid by a typical consumer for goods and services and is a common benchmark for inflation. Inflation has been slow to pick up, but CPI now stands at 1.1% year-over-year (see Figure 2). This is a significant improvement after inflation briefly turned negative in 2015 due to sharp declines in gasoline and energy prices. While inflation has made steps in the right direction, there is still more progress to be made before it returns to the Fed’s target of 2%.

Unemployment

Unemployment remains low and has continued to trend downward (see Figure 3). While the unemployment rate alone does not fully reflect the health of the labor market, the job market has consistently been improving and job growth has been strong. The unemployment rate is now below the 5% level economists consider to be “full employment.”

Although there has been significant improvement, it may not be fair to say the labor market is completely back to normal. Structural changes to the economy have created employment issues yet to be resolved as technological advances continue to alter the demands for skilled labor. Some workers may be counted as “out of the labor force” after being unemployed for too long if they are unable to find work with their previous skill set. The decline in the labor force participation rate is often cited to make this case; however, the aging of the Baby Boomer generation and changes in demographics may lead to a continuation of this trend.

Consumer: Wages, Spending, and Confidence

Consumer spending has long been a key driver to the U.S. economy, accounting for approximately 70% of all economic growth. The American consumer is in better financial shape on many different measures including lower debt service ratios as well as improving wages.

This improved economic household standing has in turn likely played into an enhanced sense of optimism being revealed through spending and saving. Indeed, consumer confidence now stands at a level in line with pre-recession levels. One measure that has struggled to improve during the recovery is wage growth. Adjusted for inflation, wage growth has been virtually flat. However, we are starting to see this change. While Americans at the bottom quarter of the income scale have felt left behind for much of the expansion, they are now starting to see pay rise at the fastest rate since the recession. Hourly wages for the bottom quarter of earners increased 3.1% from a year earlier, the largest growth since 2009. The wage gains have been driven by increased competition for workers as well as company initiatives to boost the pay for lower wage workers.

Housing

The housing market has been an economic bright spot since the financial crisis and has consistently added to GDP growth throughout the recovery. Housing prices are on the rise due to excess demand and tight supply, which may deter buyers from entering the market in the near term (Figure 4). However, there are tailwinds that should continue to push housing forward. Strong job creation and the growing number of millennials in the market may further support demand. Mortgage rates are also historically low, making it more affordable to secure a loan for purchasing a home. The 30-year fixed rate in August hovered near 3.4%. Despite mixed short-term signals, it is expected that housing will continue to recover over time.

Figures 1-4

Summary

While none of these economic indicators are particularly eye-catching on their own, when they are all considered one can see modest momentum in the economy. The Federal Reserve is also seeing this momentum and continues to evaluate whether an increase in the 30-day Fed Funds rate from its current target range of 0.25%-0.50% is warranted. Probabilities of a rate hike (as measured by futures prices) have increased lately as solid economic data continues to turn up. While a rate increase may cause short-term volatility, the subtext is that the economic recovery has been substantial.

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