Avoiding the Winter Blahs, Positives for the Economy

Pessimism has a tendency to grow as the days get shorter. However, there are some upside signals for the domestic economy. Here are three that support our growth outlook.

Labor Slack Diminishes and Income Grows

As of October, job growth has averaged over 200,000 per month this year while the unemployment rate has declined to 5.8 percent. In addition to the solid addition to payrolls, the labor force participation rate also rose to 62.8 percent—a promising development in one notably lagging series. The drop in the unemployment rate over the past year has been accompanied by a modest rise in wage rates (top graph). The unemployment rate has declined for adult women, adult men and teenagers. This is encouraging and is one of the labor market indicators followed by the Fed to guide policy decisions. The number of workers in part-time jobs for economic reasons fell—marking improvement in another nagging aspect of this recovery that consistently undermined the economy’s momentum. Average hourly earnings for all private sector employers held steady at 2.0 percent year-over-year. Job gains, along with wages gains, support the case for stronger income and consumer spending growth in 2015.


Diminishing Fiscal Restraint, Net New Issuance

There has been a tight correlation between the recent decline in the federal budget deficit and net new Treasury issuance (middle graph). This relationship has grown in importance to support the continued low interest rate outlook for Treasury debt despite the ending of QE3 by the Federal Reserve. The drag from reduced federal spending on GDP growth has diminished. Under CBO’s current law baseline projections, the deficit should shrink to $469 billion in the current federal fiscal year, before growing again fiscal 2016. The implication is that, based on our analysis, there should be one more federal fiscal year of slower net new Treasury issuance before supply begins to expand again more rapidly. For the year ahead, the reduced issuance remains a positive for lower benchmark interest rates.


Balance Sheets in Good Condition

Interest burdens for both households and non-financial businesses have lightened considerably, giving the private sector plenty of breathing space. For households, financial obligations as a percent of disposable personal income has fallen to a level reminiscent of the early 1980s (bottom graph). Financial obligations include any mandatory financial payments made by a household, including rent.
For the non-financial sector, corporate interest expense as a share of pretax profits are at the 20 percent level which is similar to the lows of 2006 for the 2000s cycle in general and below the cycle lows of 1998 during the 1990s cycle. Over the past five years, many non-financial businesses have termed out their debt and thereby reduced the interest exposure of their business in general. This will reduce the sensitivity of the business sector to the rise of interest rates that will come with any Fed actions next year.