The US economic recovery is gathering momentum. January’s impressive labour market report showed that the US is in the midst of a long, sustainable upswing that could surpass any other business cycle in the post-1945 era. QE has proved to be a powerful monetary policy tool in the US. Low short- and long-term interest rates have set the stage for an investment boom that will drive a virtuous cycle of supply-led growth and low inflation.
Some commentators nevertheless claim that the US economy is operating a long way below “trend”. They have invoked the concept of secular stagnation to describe an economic recovery that remains too weak. A lack of demand, slow productivity growth and an ageing population have combined to squeeze wages for many workers. It is not just the low paid that are suffering: many in the middle class are falling behind too.
Contrary to the assertions of these pessimists, however, “productive” investment – notably in information technology – is rising strongly in the US. Higher investment is leading to more jobs. According to the Bureau of Labor Statistics, vacancies in professional and business services soared to a record 1.03m in December last year – an increase of 51.2 per cent over a year earlier. In total, US businesses created 3.04m jobs in 2014. The increase in private non-farm employment was the biggest for any year since 1997. The unemployment rate edged up to 5.7 per cent in January, but it has consistently fallen faster than the Fed – and most other economists – forecast. The jobless rate could well dip below 4 per cent over the course of this economic cycle.
The strong rise in investment has been concentrated in information technology. Spending on software is running at record levels in real terms and as a share of GDP. Firms are committing greater sums to research & development (R&D). Record profits are being recycled into higher share buybacks, but the increase in R&D also suggests that they are being used to drive up the potential growth path of the US economy.
None of this should be a surprise. The US has led the world in technology since the internet boom of the late 1990s, and the dip in technology spending following the credit crunch of 2008 was very short-lived. This partly reflects the limited reliance on bank funding for many companies operating in the technology sector.
Critics cite the relatively slow growth of real GDP and the low rise in productivity to support their case for secular stagnation. Unemployment may have fallen, but economic growth in the US has not been above 3 per cent in any year since the recovery began.
After an initial spurt during 2009 and 2010, the rise in productivity has slowed. However, the potential for the GDP numbers to be revised up should be acknowledged. For example, there has been a persistent tendency for the official data on investment to be pushed higher in recent years: since the first quarter of 2013 alone, non-residential investment has been revised up by a cumulative $116.7bn or 5.4 per cent (0.7 per cent of real GDP). As a share of real GDP, non-residential investment is close to surpassing the highs of 2008.
The rapid technological changes underway in the US are posing big challenges for the statisticians. Measuring the real economy is becoming more difficult. It is likely that real spending on software – an increasingly important component of investment – is much higher than officially reported. The US authorities have already admitted that they are underestimating the scale of improvements in semiconductor chips and microprocessor units. These are critical to understanding the impact of IT investment in driving the higher capacity embedded in many goods.
The modest wage gains seen so far during the current US economic recovery would appear to corroborate claims that the West faces secular stagnation. Society has become even more unequal since the Great Recession. Real median household income has fallen further in the US since 2008. However, there are some signs of a turnaround after 2013 saw a small increase. The strong job creation witnessed in 2014 has given US workers the confidence to search for new, higher-paying jobs. According to the Bureau of Labor Statistics, quits rose sharply towards the end of last year. These are workers who leave their job voluntarily. In the past, this has been a precursor to higher wages.
Ultimately, sustainable wage reflation depends on the US reaching full employment – and staying there. In this respect, the control of both household and corporate borrowing remains paramount. Financial stability eluded the US from the late 1960s, until the sub-prime crisis forced the authorities to act. Keeping a tight control over private (and public sector) debt will underpin the strong investment that is driving the US towards full employment.