Let’s not pretend there’s real strength in the US economy

IT has become a favourite refrain of strategists: describing America as “the best house on a bad block”. Given Europe’s deepening recession and slowing across once red-hot Australasia, one can see why. The US economy has been chugging along at a growth pace of around 2.2 per cent; the S&P 500 has doubled since its nadir in March 2009 and is up 14 per cent since January.

But relatively better performance shouldn’t be mistaken for fundamental strength. If anything, the weak August jobs report calls attention to America’s underlying decay. The drop in the US labour force participation rate in August to 63.5 per cent -- a three-decade low – is worthy of headlines. More telling, however, is the drop in the ratio of young people in the labour force. After all, a good bit of the overall drop in the participation rate is owed to the country’s aging population. But 20 to 24 year olds are the future backbone of America – and in August, their labour force participation rate slipped below 70 per cent for the first time.

The hope is that this decline reflects increased schooling that will lead to better careers and higher productivity rates. The fear, however, is that America’s youth are simply racking up debt in the absence of decent employment prospects.

Indeed, the pace of US job growth has slowed when it ought to be accelerating. As Jefferies Group points out, at the pace seen in 2012 so far, the labour market will add just 1.8m total private-sector jobs by December, compared with the 2.1m gained in 2011.

It is possible that job gains could pick up into year-end, as was the case last year. But significantly stronger job growth is needed, not just to lower the unemployment rate but also to draw workers back into the labour force. Moreover, the inflation figures due out later this week are a reminder that even those who are working are struggling to stay ahead.

The consumer price index is expected to post a gain of about 1.7 per cent in August from a year earlier – wiping out the 1.7 per cent increase in average hourly earnings.

And a third round of asset purchases, which the Fed could announce as soon as Thursday, means support for markets – at least for a time – that will also keep a floor under commodity prices.

Kelly Evans co-hosts Worldwide Exchange for CNBC